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Trade setup: Multiple signs suggest Nifty correction overdue; tread carefully

Despite losing momentum and consolidating for the second day in a row, the domestic equity market maintained its positive closing on Friday, ending the day with minor gains.

The market saw a flat start to the session but Nifty soon moved into the positive territory. There was some volatility in morning trade as the index pared its gains. It stayed in the negative for a very brief time and then crawled higher. The market headed nowhere and spent the whole session in a minimal narrow range.

Nifty finally ended the session with a minor gain of 12.10 points, or 0.10 per cent. The market is showing clear signs of some more consolidation.

On Monday, Nifty is likely to see a tepid start. Apart from Christmas holiday, the week ahead will also see the expiry of the ongoing derivative series. F&O data showed some unwinding at higher levels. While some up-move cannot be ruled out, but Nifty remains vulnerable to more consolidation and profit-taking at higher levels.

On Monday, the 50-pack index is likely to move rangebound with 12,300 and 12,335 levels as possible resistance. Supports will come in much lower at 12,210 and 12,160. Any corrective move, if it occurs, will make the trading range wider than usual.

The Relative Strength Index or RSI stood at 67.45 on the daily chart. It continues to show bearish divergence against price. The daily MACD remains bullish and trades above the signal line. A small white body occurred on the candles, but no other important formations were noticed on the charts.

Pattern analysis showed Nifty has successfully penetrated the double top resistance at 12,103. There is some loss of momentum in this move, but as long as Nifty remains above 12,103 on a closing basis, this breakout will remain in force.

In the event of a continued up-move, traders may continue to chase the move on the upside. However, that should be done in a very cautious manner, as there is more than one piece of evidence that suggests that the market is overdue for some consolidation or minor profit taking. While continuing to remain highly stock-specific, a cautious view is advised. One should keep exposures at modest 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]

Source: Economic Times