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Will Nifty continue its rebound after a short-covering rally?

Karan DSIJ
·2-min read

Nifty staged a smart recovery from the day’s low to close above the 14,400 mark. It opened with 77 points gap down and recovered thereafter. From the day's low, it gained about 255 points and finally closed at 14,406.15 with gains of 109.75 points.     

The price action of the day has formed a bullish candle as the closing was higher than the opening level. However, a new swing low was formed at 14,150 levels, before showing an upside bounce from the day's low. Now going ahead, the level zone of 14,500-14,550 is crucial to watch out for on the upside. In any case, Nifty moved above the 14,550 level on Friday as it may turn positive in the short-term.     

Nifty has broken the long channel support line drawn from March 2020 low and 20-weekly average. It is also trying to form another indecisive candle on the weekly chart. Importantly, the short to medium-term trend indicator i.e. the 50-DMA has begun to trend down. Simultaneously, for the last six weeks, the bears are failing to pull down Nifty below 14,265 on a closing basis. It has tested this level at least six times during this period. It breached the 14,265 levels on all three trading days this week on an intraday basis.      

The RSI is bouncing from the trendline support, but it is below its nine-period average on the daily chart. With Thursday’s move, none of the indicators turned positive or gave any bullish signal. Thursday’s rally may be a result of the short-covering and a testimony of this is that Nifty April month Futures has shed 4.41 per cent in the net open interest with a price rise, which is clearly a sign of short-covering.     

The ADX is still above the 25 levels while +DMI has not gained on a positive day. These signs indicate that the index is clearly lagging on strength. Even the stochastic oscillator did not turn positive. Interestingly, the benchmark index is still below the shorter period average of 5-EMA.         

For the first time after September 2020, Nifty is about to make a lower low on the monthly chart. There are several bearish patterns and indications available in the current structure. First, during March 2021, it made a monthly lower high, and April 2021 seems to be following it up with a monthly lower high as well as a lower low, though the month has another week left. We are taking a cautious stance in the market as this structural change looks significant after a year-long uptrend.