Trade Setup: Nifty can swing either way; Volatility likely to increase

After consolidating below 13,550 for four days, the already overstretched domestic benchmark index Nifty climbed further, only to end at a new closing high.

The market had a decent positive start to the day. After holding modest gains in the first half of the day and maintaining the Rangebound mark, the market got even stronger after a small stop. Nifty went above 13,650 and sustained gains throughout the day until the end of the session, although it remained marginalized again in the last hour of the session. Nifty eventually ended the day with a net profit of 114.85 points, or 0.85 percent.


The weekly options expiration dates will affect trading in the upcoming Thursday session. Heavy put-writing was seen at 13,600. Thereafter, the 13,500 level has the highest put OI concentration, while the maximum call OI remains at 13,800. All options are now open to allow the market to swing either way. Although the market opening will be in charge overnight, we will be entering a phase where volatility will increase. However, in Wednesday’s session, the India VIX volatility index fell 0.74 percent to 19.2000.

In Thursday’s session, the 13,730 and 13,800 levels will act as resistance points while the support would be much lower at 13,560 and 13,500 levels.

The Relative Strength Index (RSI) on the daily chart is 79.81; it has hit a new 14 period high which is bullish. The RSI is neutral and shows no price divergence while in an overbought zone. The daily MACD is bullish as it is trading above the signal line.

A rising window appeared by the candles. This is essentially the result of a gap and usually implies the continuation of an upward trend. In the context of the present technical setup, however, it also resembles a gyroscope pattern that results from a small real body. In any case, it is recommended to remain very careful at the current level.

All in all, there are all possibilities for a gradual upward movement if there are no adverse indications to deal with overnight. Regardless, however, Nifty is now vastly overstretched from every possible angle. Not that this could cause the market to crash, but unless there is significant consolidation, the market has an increased likelihood of profit taking at higher levels. These can be equally sharp and violent in nature, and also lead to a large spike in volatility. A cautious view is recommended for the day.

(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])