Trade setup: Nifty may see stable start, but trading range set to get narrower

The domestic equity market refused to move out of the area pattern and displayed bearish tendencies on the expected lines on Tuesday, as the benchmark indices ended with deep cuts.

Although we can blame the overnight weak global trade setup, the internal technical structure remained quite weak as elaborated in our previous notes. The market saw a gap-down opening and turned more nervous as the day progressed. Nifty marked its intraday low in the afternoon. However, some recovery was seen from the low, as that level was defended for the rest of the day. The headline index ended with a loss of 280.40 points, or 3.03 per cent.

Volatility surged on the expected lines, causing the India Volatility Index, India VIX, to rise 4.01 per cent to 45.1975. Nifty remains within the Rising Wedge, and is likely to test the lower trend line, which is rising in nature, in the coming days. On the higher side, any up-move will face resistance near the upper boundary of the wedge.

Unless the current area pattern is resolved, we will see the trading range of the market get narrower in the coming days.

Nifty is likely to see a stable start on Wednesday. The 9,045 and 9,110 levels are likely to act as key resistance, while supports will come in at 8,910 and 8,830 levels.

ET CONTRIBUTORS

The Relative Strength Index, or RSI, on the daily chart stood at 46.33; it remains neutral and shows no divergence against the price. The daily MACD remains bullish as it trades above the signal line. A Falling Window pattern occurred on the candles. This is a gap, but since such a gap has occurred within an area formation/pattern, it holds lesser significance.

Pattern analysis makes it evident that Nifty has stayed in the area pattern. The index has currently formed a wedge. Such area patterns typically arise after a sharp bear market rally and often have bearish implications.

All in all, Nifty continues to be in a precarious position. Some modest up-moves are likely to Wednesday. In the event of such as up-move, it would be prudent to utilise these moves to protect profits on existing positions. It would not be wise to chase any movement on the upside, but stay extremely selective and defensive while approach the market. A cautious outlook is advised for the day.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)