After a massive plunge at the opening tick, there has been a massive buying witnessed from the lower levels. Investors’ high-risk appetite led to a sharp recovery from the day’s low across the board. The primary support came from the banking space, with the index clocking a 1.28% gain to 41,390, which is near the all-time high.
Coming back to the index, a steep cut in the opening session left a huge gap on the daily chart. As the market generally tends to fill the gap sooner or later, a retracement on the upside was somewhat expected. But surprisingly, the huge gap was filled with the intraday rally on the same day. This showed that the bulls are still not ready to give up.
During the rally, the did not cool off. This volatility measure generally moves in inverse correlation with the market’s move. Therefore, today’s rally should have eased off the VIX but this didn’t happen. This simply means investors are still expecting high volatility in the market, which generally directs to an impending downtrend. Currently, the India VIX is trading 4.87% up at 18.31 by 1:36 PM IST.
Image Description: Daily chart of Nifty 50 (spot) with the RSI at the bottom
Image Source: Investing.com
Now as the gap has been filled what’s next? There’s still a stiff resistance at the top for the Nifty 50, although the Bank Nifty is looking relatively stronger with the only resistance being left is the all-time high. After filling the gap, security generally reverses the trend towards the previous direction. Therefore, the trend in the Nifty 50 could still reverse from the current levels despite a massive demand from the lower levels.
For the bears, the absolute best level to try to fade the rally after a gap-down move is around the low of the previous day. That is where the gap closes. This level is extremely important because this is the level from where the left-out traders are expected to initiate new positions and traders who held the wrong position try to cut their losses short.
Another reason is the bearish divergence at the top which I have talked about several times. This divergence has started to work and the first day of correction was today. As long as the index does not cross the previous day’s high of INR 18,088.3, the divergence stays intact. Although traders need to be cautious of an upside move that could come on the back of a recovery in the US markets as yesterday, the fell over 1,200 points which indicates a probable immediate bounce.
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