Chart Check: Nifty revisits gap made post state election results; do not create short position

The bulls failed to keep the momentum going as Nifty slipped below its crucial support of 9,100 and 9,050 to visit the breakaway gap made just after the state election results on Tuesday, March 14.

The Nifty rallied 153 points on Tuesday, March 14, to touch a record high of 9,122.75, but pared some gains and eventually closed at 9,087. It created a visible gap from Friday’s high of 8,975 to Monday’s low of 9,060.

A gap is visible on the technical chart when the price moves sharply either up or down. The gap witnessed last week on Monday was a breakaway gap which usually occurs at the end of the price pattern and signals a new trend or a beginning.

The uptrend continued last week which pushed the Nifty beyond 9,200 level to hit a record high of 9,218. But, these gaps offer crucial support to the index whenever prices start falling.

Gaps usually suggest buying or selling pressure and known to strengthen the trend in that direction especially when it is a breakaway gap after consolidation.

Historically, it is seen that whenever markets revisit the said gap zones they tend to offer support or resistance as the case may be, suggest experts.

The Nifty slipped over 70 points and was trading inside the gap area of 8975-9060. Traders are advised not to create short positions as long as Nifty trades above 8,980 level.

The Nifty slid back into the gap zone formed right after the state election results. Although this is not unusual and not necessarily a sign of impending reversal, what becomes significant now is a close below 8,980.

“If Nifty loses a tad more ground and closes below 8,980 one can safely assume that the three-month-old swing on the Nifty starting at 7,950 will at least has been disrupted and best case Nifty will get sideways and spend some time between 8,900 and 9,200 before it regains its momentum,” Kunal Saraogi, CEO, Equityrush.com told moneycontrol.

“Should the Nifty close below 8,980, the election gap will become an 'exhaustion gap' which typically signals the end of a trend or a swing and will mean that traders must go short on the index with a stop loss at the upper end of the gap or 9,060 in this case,” he said.

Those with significant open long positions on the index would do well to buy insurance by buying the 8,900 Nifty current month put options just in case Nifty were to crack from current levels.

Don’t be in a hurry to sell short in these markets because it remains in a firm bull grip and odd day of weakness should be read into too much.

It is still a buy on dips market and traders with slightly longer time frame should not hesitate to go long in this zone with a stop below 8,970 on a closing basis.

“The Nifty has revisited the gap zone of 9,060 – 8,975 levels and one can safely conclude based on historical price behaviour, that buying will emerge in this zone. In the present case apart from this gap zone Nifty50 also has critical support around 9030,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in told moneycontrol.

“Hence traders/investors with slightly longer time frame should not hesitate to go long in this zone with a stop below 8,970 on closing basis whereas short-term traders with a time horizon of few days should have a stop below 9030 on a closing basis,” he said.