Trade Setup for October 7: Nifty crosses one hurdle, the next lies 40 points away

It is a positive start to the week, not with a 40-50-point gain, but a proper, trending move. The Nifty bulls could not have asked for anything more to start the new week.

The move also defies expectations that an excited IPO market could dampen some market sentiment, as two large IPOs will open for subscription this week and a two more open up on Thursday.

With Monday's surge, the Nifty has crossed one hurdle, the 50% retracement of the fall from the September 18 high to the September 30 low. The index has closed comfortably above that 25,017 mark.

For that, it has its two frontline batsman, the Nifty Bank, and the Nifty IT. Technology stocks saw a recovery from the lows on Friday and ensured the Nifty ended in the green. They built on to those gains on Monday, ahead of the TCS results on Thursday. All constituents of the Nifty IT index ended with gains, led by Coforge, and even TCS, which gained 3%.

The next important level for the Nifty to track is its 61.8% retracement of the recent fall, which comes up to 25,119, around 40 points away from Monday's closing levels. Tuesday will also be the weekly expiry of the NSE contracts.

Despite the broader markets doing fairly okay on Monday, even as they underperformed the benchmarks, the advance-decline ratio ended in favour of the stocks which fell. 1,392 stocks on the NSE ended with losses, compared to 1,228 stocks which ended in the green.

The Nifty Bank has been the key outperformer, having gained for five days in a row. The index has not only retraced its entire fall, but has also made a new swing high of 56,161 on Monday. The banking index has gained nearly 1,800 points in the last five trading sessions. That level now becomes the key to watch on the upside, before the July 31 high of 56,406 comes into focus.

The index is now holding above all key moving averages, with a significant bullish crossover of the 9-EMA over the 50-EMA, adding momentum to the upside. The hourly Super trend indicator remains placed around 55,700, marking an important trailing support level for the index. The next immediate resistance is placed around 56,350–56,500, while support is seen near 55,700, followed by 55,600, Om Mehra of SAMCO Securities said.

Tuesday's session will see reaction to more business updates. Trent may see a proper reaction as its business update was released just minutes before closing and the stock fell 4% from the day's high post that. More updates from Bank of India and other such stocks will also see a reaction.

Nagraj Shetti of HDFC Securities observed the formation of a long bull candle on the Nifty daily chart, indicating a strong breakout of the 24,900 resistance zone. The underlying trend, according to him, remains positive, and the next levels to watch on the upside will be between 25,300 and 25,400.

"Going ahead, the zone of 25,130-25,180 will act as a crucial hurdle for the index as the 61.8% Fibonacci retracement level of its prior downward journey (25,449 - 24,587) is placed in that region. Any sustainable move above the level of 25,180 will lead to a sharp upside rally upto the 25300 level. While, on the downside, the 20-day EMA zone of 24,950-24,920 will act as crucial support for the index," Sudeep Shah of SBI Securities said.