Technical View: Nifty forms bullish candle; correction likely as market at overbought zone

July 31
17:29 2018

The Nifty50 after opening lower traded in a negative territory amid consolidation, but managed to recoup those losses in the last hour of trade and ended at record closing high for fourth consecutive session on Tuesday ahead of RBI rate decision tomorrow.

The index formed bullish candle on the daily charts, which also resembles a ‘Hanging Man’ kind of pattern on the daily charts.

A Hanging Man is a bearish reversal candlestick pattern which is usually formed at the end of an uptrend or at the top (400-point rally from its recent low of 10,957.10 recorded on July 19). In a perfect ‘Hanging Man’ pattern either there will be a small upper shadow or no upper shadow at all, a small body and long lower shadow.

The 50-share NSE Nifty opened lower at 11,311.05 and hit an intraday low of 11,267.75, but it managed to recoup morning losses in the last hour of trade and touched an intraday all-time high of 11,366. The index closed 37 points higher at 11,356.50.

It rallied nearly 8 percent, so far, in 2018 and gained 6 percent in July.

“Albeit Nifty50 recoiled after almost testing its Monday’s low it registered a Hanging Man kind of formation once again for a second day in a row signalling caution,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, told Moneycontrol.

He said as index value is stretched on the upside and trading abnormally away from its short term moving averages a mean reversion phenomenon shall kick in any time pulling back the prices to align themselves with their averages. “Even technical oscillators are strengthening the case for short term pull back as they reached extremely over bought zone warranting a correction or a pause in the ongoing upmove.”

However, as market is heading into monetary policy event on Wednesday trading may remain lacklustre ahead of the policy announcement and any disappointment may act as an excuse to set the tone for a corrective and consolidation phase for couple of days, according to him.

In case if the policy is in favour of bulls then this rally shall get extended upto 11,450 levels which should be used by the short term traders to book profits, Mohammad advised.

India VIX dropped 1.25 percent to 12.43. Overall lower volatility suggests bulls are holding the tight grip on the market, experts said.

On option front, maximum Put open interest (OI) was seen at 11,000 followed by 11,200 strike while maximum Call OI was at 11,500 followed by 11,400 strike. Put writing was seen at 11,000 and 11,200 strike whereas Call writing was seen at 11,400 followed by 11,700 strike.

The Nifty index has been making higher highs – higher lows from last eight trading sessions and even small decline is being bought in the market,” Chandan Taparia, Associate Vice President | Analyst-Derivatives, Motilal Oswal Securities told Moneycontrol.

He said now it has to continue to hold above 11,300 zones to extend its move towards 11,400 then 11,500 zones while on the downside major support is seen at 11,250 then 11,171 zones.

Bank Nifty formed an inside Bar pattern as it got stuck in between 27,651 to 27,839 zones but continued its formation of higher lows for last six trading sessions.

Now it has to continue to hold above 27,650 zones to extend its move towards 28,000 then 28,250 zones while on the downside major support exists at 27,500-27,400 zones, Taparia said.

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