Avoid short positions above 17175

The global and domestic equity market rebounded strongly. The Dow and S&P-500 closed above their 50DMAs. The Indian benchmark index traded in the 790 points range and finally settled with a net gain of 656.60 points or 3.95 per cent. The BSE Sensex gained by 4.2 per cent.

The broader market indices Nifty Midcap-100 and Smallcap-100 indices underperformed with a gain of 2.7 per cent and 1.2 per cent, respectively. The Nifty Financial services index and Auto were the top gainers with over 6 per cent. All the sectoral indices advanced over a per cent last week. The market breadth is primarily positive. For the previous two days, FIIs turned buyers, and sold Rs41,617.18 crore this month. DIIs bought Rs31,620 crore.

The benchmark indices rallied sharply above the 200DMA and 50DMA, with a higher volume on Thursday. This turns the market status to a confirmed uptrend. For the last two weeks, the benchmark index oscillated widely in 790- 1086 points during the last two weeks.

The massive shorts were squeezed during the last two days, and this short-covered fuelled the rally. After the positive gap openings, the Nifty traded in a very tight range on the daily chart. These gaps forced to cover the shorts. Friday's runaway gap did not attract fresh positions. In fact, the Open Interest was declined on a massive volume and two per cent rising day. The 24th February gap was filled on Thursday. Now, there are no gaps to be filled on the upside. Since 7th March, at least two gaps have been present in the current upswing.

The Nifty also closed above the 61.8 per cent retracement level of the prior downswing and losing above the 50 and 200DMA, are the significant technical developments to confirm the uptrend. But, it needs the follow-through price action for the next two days, with an increased volume. Surprisingly, the cash volumes are above the average on Thursday and the highest in the last five days. Last week's entire rally is just because of short-covering.

The event risks like UP elections domestically and the US Fed meeting global turned positive. The Ruling BJP retained the power in UP, and the US Fed raised the interest rates by just 25 basis points, contrary to intended to rise 50 points. These fundamental and even risk outcomes helped for sentiment boost. At the same time, FIIs fresh buying fuelled the short-covering.

This current recovery is the second impulsive move in the last three months. In the last eight trading sessions, the NSE Nifty gained by 1673 points or 10.68 per cent. From December 20 to January 18, NSE Nifty rose by 1940 points or 11.82 per cent. Comparatively, the current swing is more impulsive than the earlier one.

We expected this kind of impulsive counter-trends at the beginning of January. The index is out of the downward channel. Before that, it met the Head And Shoulders and upward channel targets in a faster manner. The question is that 'will the follow-through days take the index beyond 17484', where 61.8 per cent retracement level is placed of the fall from October 19.

The RSI closed above the prior minor highs. On the weekly chart, it needs further strength to clear the prior high. The Weekly MACD line is bouncing from the zero line. The KST indicator has given a fresh buy signal on a daily chart. The Nifty may continue its positive stance beginning of next week. But, every impulsive move has undergone counter-trend consolidation.

Watch the index behavior around 17500 on the upside. It may act as the immediate resistance. On the downside, the gap area of 17175-16987 is important. A close below the 16987 will be negative for the market direction. Technically, the market structure is strong, avoid short positions above 17175. It is better not to chase the upside move and wait for consolidation. Traditional defensive sectors, Pharma, IT, and FMCG sector may outperform in coming days.

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