Trade Setup: Nifty looks upbeat; use any bounce to protect profit

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Following a strong overnight handover from the US markets, Indian equities extended their bounce and ended yet another day with gains. The market saw a positive start to the day, but pared most of the gains in the morning session. The momentum picked up again and the index spent the remaining part of the session recouping the lost gains.

Finally, Nifty managed to recover most of the gains and ended with net gain of 93.95 points, or 0.74 per cent.

From a technical perspective, the market is giving us chances, more than once, to protect profits at current levels. It was the second session in a row that Nifty formed a ‘Hanging Man’ kind of candle. Such a formation, if it comes following a substantial bounce, would be a warning sign for an impending corrective move.

Volatility rose, and this was reflected in INDIA VIX inching higher by 3.52 per cent to 19.8025. With the market moving in the uncharted territory in overbought zone and having completed all the technical price targets, Nifty now stands clearly vulnerable to strong bouts of profit taking.

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On Wednesday, Nifty is likely to face potential resistance at 12,930 and 12,980 levels, while supports will come in much lower at 12,850 and 12,710 levels. Any bout of profit taking will make the trading range wider than usual.

The RSI stands at 7,760 level. It is in the overbought zone, but remains neutral as it does not show any divergence against price. The daily MACD remains bullish and trades above the signal line.

A Hanging Man candle appeared on the charts. The formation of such a candle can be potentially bearish, if it occurs following a steep uptrend, which is the case with Nifty in the current setup.

Nifty has surpassed all possible technical targets, which it should have achieved following a breakout of the 12,000 level. We are not disputing the fact that the current rally has got global reasons attached to it. At the same time, it is high time that one should stop chasing the market blindly. There are times when such bounces should be used to protect profits and not to make fresh purchases.

As we step into the new session, we would reiterate using any extension of market moves on the upside to protect profit. One should refrain from fresh purchases or keep them extremely defensive and in moderate quantities. Nifty is overstretched despite all justifiable reasons and remains prone to sharp bouts of profit taking at higher levels.

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

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