Trade setup: Nifty needs to stay clear of 10,545 to extend gains

In the previous market note, it was advised to avoid fresh shorts and panic selling. The Tuesdays session saw NSE benchmark Nifty stage a solid rebound to end the day 60.70 points or 0.58 per cent higher.

The pullback came on the back of strong short covering, which saw the index recover 250 points from the days lows. Nifty Bank index too spurted over 550 points from the days low. The market breadth remained strong, as broader indices outperformed headline Nifty.

Dalal Street managed to digest state elections outcome and RBI Governor Urjit Patels resignation with ease on Tuesday. Now, with election results discounted in the earlier session, expect this technical pullback to continue.

Having said that, Tuesdays pullback has halted at the pattern resistance level, which also coincides with the 50-DMA, presently at 10,545. It would be important for Nifty to move past 10,545 and trade above this level.

The Wednesdays session is likely to see a flat to mildly positive start if we dont have negative overnight news flow to deal with. The levels of 10,590 and 10,675 will act as immediate resistance area, while supports may come in at 10,480 and 10,410.

The Relative Strength Index (RSI) on the daily chart stood at 45.5408 and it remained neutral, showing no divergence against the price. The daily MACD was bearish, as it traded above its signal line.

A large white candle emerged on the daily charts. This formation can be interpreted in two ways. It is an Engulfing Bullish candle and can be interpreted as a potential trend reversal, as it has emerged after decline. This candle can also be interpreted as a Piercing Line. During such formations, the price opens low, moves even lower then recovers and ends on a very strong note.

Despite the strong recovery, we continue to suggest approaching market with high caution. Nifty still has many overhead resistances to clear and remains vulnerable to some consolidation again at the higher levels.

Though we strongly recommend refraining from creating shorts, profits should be protected vigilantly at higher levels.

Market has not suffered any structural breach, and therefore, all dips should be continued to be used in making modest selective purchase.

(Milan Vaishnav, CMT, MSTA is Consultant Technical Analyst at Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at [email protected])

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