Technical View: Nifty forms bearish candle after 6 consecutive weeks; 11,550 crucial for bulls

September 07
18:29 2018

The Nifty50 after gap up opening immediately fell sharply but rebounded in late morning deals and traded higher for rest of the session amid volatility on Friday. The index formed small bullish candle on the daily charts, which also resembles a ‘Hammer like pattern. The recovery in rupee and stability in crude oil prices supported the market.

The Nifty snapped six-week winning streak, forming bearish candle on the weekly charts which also looked like ‘Hammer’ kind of formation or ‘Bearish Engulfing’ pattern.

The index corrected 0.8 percent in the passing week after registering 6 percent rally in previous six consecutive week.

A Bearish Engulfing Pattern consists of two candles. One candle is usually a small candle which is followed by a large black or red candlestick pattern that engulfs the short one or the previous candle.

A bearish candlestick pattern suggests that bears were able to regain control after the index moved in a narrow range for the past few sessions. It is usually seen as the end of an uptrend but if index breaks below its crucial support level of 11,550, selling pressure could accelerate.

A Hammer which is a bullish reversal pattern is formed after a decline while a Hanging Man is a bearish reversal pattern. A Hammer consist of no upper shadow, a small body, and long lower shadow. The long lower shadow of the Hammer signifies that it tested its support where demand was located and then bounced back.

The Nifty50 after opening up opening at 11,558.25 immediately fell sharply below 11,500 to hit an intraday low of 11,484.40, but rebounded in late morning deals to hit a day’s high of 11,603.

The index saw some profit booking at higher levels, which dragged the market tad below the psychological 11,600-mark at close. It closed 52.20 points higher at 11,589.10.

“Last three sessions of price action on Nifty50 is looking quite interesting as it registered long lower shadows in all the sessions which resulted in Hammer kind of formation suggesting buying interest at lower levels after hitting a short term bottom of 11,393,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, told Moneycontrol.

He said even weekly charts also registered Hammer kind of formation with long lower shadow as more than fifty percent of intra week losses were recouped. “This kind of price action has clearly tilted the tide in favour of bulls in near term. As our twin momentum oscillators also generated a buy signal we expect this rally initially to get extended upto 11,679 levels. As participation is becoming wide and broad based after the recent correction we will not be surprised even if bulls made an attempt to get past 11,700 levels.”

However, at this juncture it will be too early to conclude that bottom is in place and hence traders are advised to book profits around 11,680 levels, he said, adding on the downside, it is advisable to maintain a stop of 11,470.

The India VIX rose by 1.58 percent to 13.94. On the option front, maximum call open interest (OI) of 40.01 lakh contracts was seen at the 11,800 strike price followed by the 12,000 and 11,600.

Maximum put open interest of 47.64 lakh contracts was seen at the 11,500 strike price followed by the 11,400 and 11,000.

“The Nifty on the weekly chart formed a bearish Belt Hold candle along with an Engulfing Bear pattern. This marks end of the July-August rally from short term perspective,” Gaurav Ratnaparkhi, Senior Technical Analyst, Sharekhan by BNP Paribas said.

He further said the recent structure shows that the Nifty is in pullback mode after first leg of the fall. “The pullback, however, turned out to be a deep one. It has reached near 61.8 percent retracement of the recent fall.”

The Golden Ratio mark generally acts as a high probability level from where change in direction can be expected and the same is likely in this particular case as well, he feels.

Ratnaparkhi said to add weight of evidence in favour of the bears the index has formed a bearish wedge pattern on the hourly chart. “Thus next leg down seems to be around the corner. A sharp fall can be expected once the Nifty breaks the immediate support zone of 11,550-11,530. From short term perspective, 11,350-11,300 shall be the target area to watch out for.”

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