Trade setup: Nifty50 to stabilise if it is able to defend 10,572 level
Friday is expected to see the levels of 10,655 and 10,720 acting as immediate resistance.
Despite the absence of any negative cues from the US markets -- which were closed on Wednesday in honour of past president George HW Bush who passed away last Friday -- Nifty still opened below the 200-DMA. A feeble attempt to recover was made later in the day, but the gains were sold into.
On Friday, it would be extremely crucial for the index to defend the 10,572 level. This is also a very important pattern support, and the 50-DMA level for Nifty.
The pattern support was in form of an upper trend line of the falling channel, which Nifty had created and eventually moved higher while breaking out of it. We expect a soft start to the trade on Friday, but also see this level lending support.
Friday is expected to see the levels of 10,655 and 10,720 acting as immediate resistance, while the supports may come in at 10,570 and 10,510.
The Relative Strength Index (RSI) on the daily chart stood at 46.72 and it marked a fresh 14-period high, which was bearish. Additionally, the RSI also showed bearish divergence against the price. The daily MACD continued to trade above its signal line, but was seen narrowing its trajectory. A big black candle emerged just below the 200-DMA and this has reinforced the importance this zone as key resistance over the coming session.
Pattern analysis revealed that Nifty has achieved a full throwback after it broke out of the falling channel, which it had created for itself. The index has rested exactly on the upper trend line that it had breached on the upside.
Ideally, Nifty should take support at the 200-DMA. However, amid global risk-off and resultant headwinds, the index behaved once again as if something as important as 200-DMA does not exist at all.
It would be extremely crucial for Nifty to defend the 10,572 level. Any breach below this level will invite more weakness.
We expect some respite from this weakness if 10,572 is defended. Also, significant number of shorts were seen being added as the decline has come with large addition of net open interest in Nifty.
It is suggested to now avoid fresh shorts and keep overall exposures moderate. Modest purchases may be made with each downside that the Markets may offer.
(Milan Vaishnav, CMT, MSTA is Consultant Technical Analyst at Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at firstname.lastname@example.org)