Trade setup: Nifty Put-Call ratio is sending out ominous signals

In yet another solid bounce, domestic equity indices extended their move on the upside to end with gains. The market saw a better-than-expected start to the session. After opening on a stronger note, Nifty maintained its gains, though it moved in a narrow 40-point range throughout the day. The session remained somewhat jittery, but Nifty was able to maintain its gains. After rangebound but erratic moves, the headline index ended with a net gain of 120.50 points, or 1.11 per cent.

The PCR, or Put-Call Ratio, has moved past the 1.80 mark, which shows that the market is clearly overbought in the near term. India VIX, which signals volatility in the near term, also rose marginally by 2.30 per cent to 24.7125. Regardless of the situation whether the market extends its up-move or not, the current technical setup has become extremely skewed in terms of risk-reward and short-term traders should refrain from creating any major long positions unless some consolidation happens in the near term.

On Tuesday, Nifty will face resistance at 11,045 and 11,150 levels, while supports will come in at 10,950 and 10,860 levels. The Relative Strength Index, or RSI, on the daily chart stood at 69.90. The RSI has shown evidence of a bearish divergence against price. The bearish divergence occurred as Nifty marked a fresh high, but the RSI did not mark a 14-period high. The daily MACD is still bearish, as it trades below the signal line.

A Rising Window occurred on the candles. This resulted out of a gap and usually translates into a bullish continuation of the trend. However, this will need confirmation on the next trading session.

Pattern analysis showed Nifty has edged higher and is comfortably placed in the upward rising channel. Currently, the index trades above all its key moving averages.

If we examine the technical setup from a very short-term perspective, the market remains overbought and lacks internal strength that it would otherwise need to sustain at such higher levels. The PCR of over 1.80 cannot be overlooked; lead indicators like RSI are also showing continued bearish divergence against price.

It may so happen that the Index may be propelled higher by select stocks for some time. That would mean absence of broader market participation.

We recommend short-term market participants to refrain from creating any significant long exposure, and focus more on taking profits home 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)