Trade setup: Nifty risk-reward now most unfavourable in recent times

The domestic equity indices had a much buoyant and better-than-expected start to the week, as they opened higher, got stronger during the session and ended with decent gains.

While the US markets were shut on Friday, Asian markets opened higher on back of strong gains in Dow futures. Regardless of any other thing, liquidity continued to propel markets higher without showing any intent to correct. After testing a level just above 10,800, Nifty came off a bit, but still ended with a decent gain of 156 points, or 1.47 per cent.

The markets are currently being propelled higher by an established risk-on environment and a massive liquidity push. While the market continues to pay little heed to a few important resistance points, it has turned overbought on the daily chart in the process and has reached a stage where upper targets matter little; and all one can do is keep trailing stop losses to protect profits at these levels.

Any fresh chase is now set to make the risk-reward most unfavourable in recent times. The volatility continued to slide as the INDIA VIX declined 2.21% to 25.1975.

Going ahead, the 200-DMA would be the most important resistance point for Nifty. It current stands at 10,887. Apart from this, the 10,760-10,800 zone needs to be watched. Supports, on the other side, will come in much lower at 10,685 and 10,600 levels.


The Relative Strength Index or RSI on the daily chart stood at 71.30; it is neutral and does not show any divergence against price. The RSI is now in the overbought zone. The daily MACD remains bullish as it trades above the signal line. A rising window occurred on the candles.

This results out of a gap-up and usually implies continuation of the uptrend. However, this also needs confirmation on the next trading day.

Pattern analysis showed while continuing to stay within the upward rising channel, Nifty is inching higher towards the 200-DMA mark. The index is currently mildly overbought and is set to enter a slightly broad but one of the strong resistance zones of recent times.

While not disrespecting the fact that strong liquidity-driven rallies tend to disregard some key technical levels, still it must be told that chasing such rallies blindly would not be prudent, especially at current levels. While traders have no option but to keep chasing the rally and the trend as long as it lasts, it should be done prudently and selectively while adopting a cautious approach towards. We recommend trailing exits and protecting profits vigilantly at current 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)