Trade Setup: Nifty50 remains directionless; close above 50-DMA crucial for up move

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Indian equity markets opened lower on Thursday, markets got weaker as the day progressed and ended the session on a negative note. Nifty50 opened with a minor gap down and marked its intraday high point in the opening minutes of the day. With the headline index opening below 18000-level, it slipped further and went on to test its key support levels. Nifty50 did see some recovery from lower levels as the index recovered over 75 points. However, the benchmark index ended the day with a net cut of 143.60 points (-0.80 per cent).

Thursday’s session was dominated by weekly options expiry. The level of 17800 had a maximum accumulation of Call OI; this prevented Nifty50 from slipping below that point. Apart from that, more importantly, Nifty50 once again went close to the 50-DMA and rebounded a bit from there. The 50-DMA, which is presently at 17775 is a very important near-term support on a closing basis to watch for. Any violation of this level will push Nifty50 into an intermediate corrective trend. Unless Nifty50 climbs above 18150, it will remain prone to weakness from every technical pullback that it may witness.

Friday is likely to see the levels of 17950 and 18000 acting as immediate resistance points. The supports come in at 17800 and 17770.

The Relative Strength Index (RSI) on the daily chart is at 48.42; it is neutral and does not show any divergence against the price. The daily MACD is bearish and stays below the signal line. No major formations were noticed on the candles.

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The pattern analysis shows the formation of a potentially bearish Head & Shoulders pattern. Although this is not a classical H&S pattern as it is rising and has an incline, it certainly has the potential to infuse some weakness to the markets and push the index into an intermediate corrective trend if some key support levels are violated.
Importantly, we must not interpret the present formation as a bearish one. It also needs to be read along with other technical levels. The formation of the neckline of the H&S pattern coincides with the 50-DMA which presently stands at 17755. So even if Nifty50 sees some decline, it will not get weaker, as long as it is able to maintain a close above the 50-DMA.

We recommend not creating any positions in “anticipation” of any trend. We recommend continuing to stay light on positions until Nifty50 takes a directional trend. Until this happens, a continued cautious and selective approach is advised for the day. Profits must be protected on either side until a clear trend is established. A cautious outlook is advised for the day.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of EquityResearch.asia and ChartWizard.ae (ChartWizard, FZE) and is based at Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)