Volatility likely to be hallmark of today's trade, stay cautious!

It was a historic day on D-Street as Sensex crossed the milestone level of 50,000 for the first time ever! However, the street, which was seen celebrating with high-fives and fist bumps in the first half of the trading session, turned mournful as all of a sudden, the street was gripped by nerve-wracking volatility on the eve of the weekly options expiry.  

In the last hour alone, Nifty witnessed a movement of 220 points. At close, Nifty ended the session with a modest loss of 0.37 per cent but from the day’s high, it fell nearly 160 points. The fall in the broader markets was much more severe with Nifty Mid-cap and Small-cap losing 1.22 per cent and 0.64 per cent, respectively. All the sectoral indices ended in red with the PSU Bank index emerging as a top laggard, followed by Nifty Realty and Nifty Metal.     

Thursday’s volatility definitely reminds us of a quote from George Soros, who used to say, “Short-term volatility is greatest at turning points and diminishes as a trend becomes established”. The price action of the day formed a bearish candle that resembled a dark cloud cover pattern.

Despite the sharp volatility, which was witnessed during the second half of the trading session, the index had managed to hold above the prior session low. Besides, at the same time, it did not breach the short-term moving average of 5-EMA. Though the volatility created a sense of nervousness in the markets yet structure-wise, there wasn’t much harm done.    

 Having said this, there are some grave concerns, which one should not ignore at all. Nifty has rallied nearly 95 per cent from the lows of March. With this, the index is currently trading up by 28 per cent from its long-term moving average i.e. 200-DMA, and nearly 7 per cent up from the 50-DMA. This indicates that the price is trading far away from its mean. If we can take some cue from history, such instance leads to a formation of the top as all the major tops were formed between 20 per cent and 30 per cent from the 200-DMA, earlier in the past.       

We would advise the traders to keep a trailing stop-loss of identical low of Wednesday and Thursday’s session, which is placed around 14,500 levels while on the upside, immediate resistance is seen around the zone of 14,750-14,800.