Trade Setup for May 19: Nifty bulls hope Monday's 350 point recovery is not a 'trap'

This market is turning out to be a proper tussle between the bulls and the bears, and an equal nightmare for someone taking a directional position without a hedge.

Monday's recovery signifies two things: One, the fact that the bulls do not want the index to capitulate just yet despite multiple headwinds plaguing them in the face - that of higher oil prices, a record low currency and rising bond yields across the globe. The recent Nifty lows have been confined between the 23,250 - 23,350 mark, as evident from Monday's low of 23,318 as well.

Second is the fact that despite this recovery, the road to 24,000 still is distant and uncertain. The index made a high of 23,695 on Monday, before reversing slightly. The 23,700 - 23,800 continues to remain a barrier for the index.

What also needs to be monitored going into Tuesday's NSE weekly expiry is that for how long will the IT stocks keep piggy-backing on a weak rupee. It was IT that led the recovery on Monday before HDFC Bank, Reliance Industries and other heavyweights also stepped up to play their part. IT will remain in the spotlight till the time the currency weakness continues, but if and when it does reverse course, will other index constituents step up? That's a question that needs an answer.

Earnings season is drawing to a close, but there are quite a few important names yet to report results. Most of those that reported after market closing on Friday and over the weekend, had a negative reaction in Monday's trade, falling between 5% to as much as 18%. And despite the benchmark index recovering from the lows, the market still had an advance-decline ratio of 1:3.

Indian Oil, SPARC, Ola Electric, JK Paper, JSW Cement are some of the stocks that will be reacting to their results on Tuesday. BEL, BPCL, GSFC, PI Industries, PNC Infra, Prince Pipes, Orkla India, RITES, Safari Industries, Zee Entertainment, Zydus Life are some of the important results that will be reported on Tuesday. Zydus Life is also going to be considering a share buyback along with its results.

Key Levels To Watch

For the Nifty 50, the index continues to find support first at 23,500 and then the important 23,350 - 23,250 zone, from where the recent lows have found buying interest. On the upside, crossing and sustaining above 23,700 - 23,800 will be key for the index to head back towards the 24,000 mark.

The Nifty Bank recovered over 750 points from the day's low on Monday, and the bulls will hope that it continues to sustain above the 53,500 mark for a move back towards 54,000. The 53,000 - 52,750 zone will be where the index would look for support in case of more volatility.

What Do Analysts Have To Say?

"The immediate hurdle for the Nifty is placed near its 50-DMA at 23,770, while key support is seen around 23,300 levels," according to Nilesh Jain of Centrum Broking." A sustained decline below the 18 mark for India VIX would be crucial for bullish momentum to regain strength. Overall, we expect the Nifty to trade in a broader range of 23,300–23,800 levels in the near term," he added.

Rupak De of LKP Securities believes that the index now faces resistance at the 61.8% Fibonacci retracement level of 23,650 and a sustained move above that could trigger a short-term rally towards the 24,000 mark. He too warned that until the India VIX continued to remain above 18.5, the market could continue to experience volatility.

Sell Nifty Bank On Rise

"The overall setup suggests that the index is currently witnessing a weak consolidation phase after breakdown pressure, where volatility-driven moves and stock-specific action are likely to dominate near-term trade. As long as the index remains below 54,300, a "sell on rise" strategy may continue to remain favorable for downside targets towards 53,000 – 52,800, while only a decisive reclaim above 54,500 could trigger fresh short-covering momentum towards 55,000 – 55,300 levels," Dhupesh Dhameja of SAMCO Securities said.