More shortcovering amid weekly F&O expiry

The domestic equity market closed positively for the second successive day. The broader market participation led the rally. NSE Nifty closed at 16345.35 with 331.90 points or 2.07 per cent. The Media and the Realty sector indices were the top out-performers with 4.05 per cent and 3.05 per cent gains, respectively. Most of the sector indices gained 1-3 per cent. The Metal, CPSE and PSE indices closed slightly lower by 0.34 per cent to 0.90 per cent. The market breadth has improved significantly positively as 1717 advances and only 358 declines. About 27 stocks hit a new 52-week high, and 244 stocks traded in the upper circuit. ICICI Bank, Reliance and Tata Motor were the top trading counters.

The Nifty has met the channel breakdown target and filled the Monday gap. On Tuesday, it formed bullish engulfing and got a confirmation for a short-term reversal. As per the Nison principle, after the confirmation of the bullish reversal pattern, the price will be in positive territory for another 3-5 days. There are several short-term indications available now.

After testing the August 2021 breakout levels, the Nifty is bouncing. It also retraced above the 23.6 per cent level of fall from January 16. The RSI has formed a hidden divergence and bounced from the historical support area of the 30 zone. Before today's massive move, it gave clues for the last two days. On Monday, it formed an indecisive Doji candle and was followed by a bullish engulfing candle. Generally, when the southern Doji gets the bullish confirmation, expect a short-term rally. The other reason is that the market has to come out of an oversold zone. The Nifty also met the 100 per cent target of the ABCD pattern. The index is closed near to the 8EMA (16362) resistance and a close above this level will test 16708, which is 38.2 per cent of the recent decline.

A majority of the last two days of the rally is because of short covering. The system needs to absorb the short at one point in time. The Nifty future volume for the last two days indicates the same. The volume recorded was lesser than when it declined. The PCR decreased to 1.41 from 1.91, which is very high. As the weekly expiry is in place, expect more short-covering may lead the market to a short-term rally. Don't be in short unless it fails to move or sustain above the 16362 level. And focus on some leading large-cap stocks.

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