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Nifty hints trend reversal with a gap-down open

Monday’s above-average volume is a concern; RSI reached into the overbought zone

Representational image

Representational image

As we expected, the market opened with a big positive gap. As the US debt ceiling reached an amicable solution, the global markets also rallied on Friday. The NSE Nifty ended with 99.30 points or 0.54 per cent gain, at 18,598.6 points. Only the Nifty IT index was down by 0.39 per cent. The Bank Nifty, FinNifty, Auto, Metal, and Reality indices gained by 0.6 per cent to 0.94 per cent. All other sectoral indices gained by less than 0.50 per cent. The India VIX is also up by 3.34 per cent. The market breadth is positive as advance-decline ratios are at 1.26. About 126 stocks hit a new 52-week high, and 74 stocks traded in the upper circuit. HDFC Bank, Reliance, and ICICI Bank were the top trading counters on yesterday in terms of value.

After opening with 120 points gap up, the Nifty traded in the 60 points tight during the day. It closed below the opening level. The last hour’s above-average volume suggests the profit booking. It traded mostly in the first five minutes range for the day. There are no intraday trading opportunities for traders on yesterday. As the US market closed for Monday, the cues were missing from the global markets. Monday’s price structure looks like an Evening Star candle. An open with a gap down and closes negative means have to give a reversal single. Monday’s above-average volume is a concern. The RSI reached into the overbought zone. On the 21st of December when Nifty formed a similar candle and later it has undergone correction. Even on that day also, the volumes were recorded above average.

If the Nifty opens with a gap down close negatively means that Monday’s evening star will get the confirmation for its bearish implications. Monday’s high and low, 18,641.20 and 18,581.25, are the crucial support and resistance for today. If it closes to 18,642, the Nifty will test a new lifetime high in no time. But a negative closing will signal the reversal. Even though the Nifty is near the lifetime high, only a few stocks are trading at their new highs. Unless a majority of stocks hit the new lifetime and the index has a greater relative, we can trust the rally. Stay cautious at the opening. An opening range breakout strategy can work better in these conditions.

(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)

T Brahmachary
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