Trade setup: After short-covering bounce, weekly expiry to decide Nifty next move

The domestic equity market saw a trending session on Wednesday, and the headline index went on to end the day with gains. Nifty futures have traded at a steep discount to spot price in the past couple of days, and this was evidence of the existence of shorts in the system.

The market saw a positive opening on Wednesday and traded in a capped range in the first hour. Nifty soon started an up-move and managed to close with net gains of 127 points or 1.24 per cent despite rangebound move in the last hour of the trade.

The past few sessions have seen the discount on Nifty futures widen to 68-70 points, which is enough evidence of shorts in the system. Wednesday’s move came on the back of sharp short covering. This was evident from the fact that the discount on Nifty futures to spot price narrowed to just 25-30 points by close.

Volatility has declined substantially, and volatility index INDIA VIX has dropped 3.43 per cent to 28.1175. Thursday’s session will be dominated by the expiry of weekly options. The 10,455 and 10,500 levels will act as overhead resistance points, while supports will come in at 10,310 and 10,235 levels.

The Relative Strength Index or RSI stood at 64.10 on the daily chart. It remains neutral and does not show any divergence against price. The daily MACD has shown a negative crossover. It is now bearish and trades below the signal line. A white body emerged on the candles. Apart from this, no other formation was noticed.

Nifty continued to stay within the Rising Channel formed after the Rising Wedge pattern was resolved as a continuation pattern. However, it has formed a lower top near the 10,550 level within that channel and remains an immediate point of resistance and concern for the market.

In weekly options, the maximum Call open interest stood at 10,500 level followed by 10,400. This means, the 10,400-10,500 zone will act as a key resistance for the index on Thursday.

Weekly expiry and adjustments will add to some rangebound oscillation in Nifty and may keep the market in a broad range. We recommend chasing the upward momentum, if any, in a highly stock-specific manner. Avoid excessive exposure on either side and the focus should be on protect profits 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 milan.vaishnav@equityresearch.asia)