Technical View: Nifty forms #39;Bearish Engulfing#39; pattern; traders can stay away till volatility subsides

October 09
18:29 2018

The Nifty50 after gap up opening continued to be volatile throughout the session. The index made attempt twice – in morning and in late trade – to touch 10,400 levels but saw selling pressure both the time due to new rupee low and crude volatility on Tuesday.

The index closed tad above 10,300 and made a bearish candle formation on the daily charts which resembles like a ‘Bearish Engulfing’ pattern.

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.

The Nifty50 opened sharply higher at 10,390.30 and touched an intraday high of 10,397.60, but gradually wiped out gains in morning trade itself to trade lower. In the last hour of trade, it rebounded, but within few minutes of trade, it caught in bear trap again and fell sharply to hit day’s low of 10,279.35. The index closed 47 points lower at 10,301 amid volatility.

“Market continued to remain volatile as pull back attempt was aborted almost around Monday’s high of 10,398 levels before signing off the session with a bearish candle which resembles a Bearish Engulfing formation as today’s candle body engulfed the candle body of Monday’s session,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, told Moneycontrol.

He said albeit intraday pull back attempts can be expected going forward they shall remain untradeable as indices are yo-yoing in both directions and Nifty50 may not gain sufficient strength unless it registers a close above 10,550 levels.

On the downsides, he feels, breach of 10,198 can give enough impetus to bears once again to push the indices below 10,000 levels. Hence, it looks prudent on the part of traders to stay away from this market till volatility subsides, Mazhar advised.

India VIX fell by 1.93 percent to 19.75 levels. Overall higher volatility suggests a bear grip but a cool off in VIX with a topping out formation could form a short term bottom in the market.

On option front, maximum Put open interest (OI) is at 10,000 followed by 10,500 strike while maximum Call OI is at 11,000 followed by 10,800 strikes. Put writing was seen at 10,500 and 10,300 strikes while Call writing was seen at 10,400 and 10,600 strikes. Option band signifies a hold of support while upside hurdles could continue at higher zones.

“Nifty index had a volatile session as bulls and bears both were fighting hard to defend 10,400 and 10,300 zones respectively. It managed to recover towards 10,385-10,400 zones but absence of follow up have taken it back to 10,300 levels,” Chandan Taparia, Associate Vice President | Analyst-Derivatives, Motilal Oswal Financial Services said.

Recently it has taken support at its rising trend line which is formed by connecting its major swing lows of 6,825, 7,893 and 10,200 zones but absence of follow up confirmation suggests that bears are holding the tight grip on the market, he added.

He said now the index has to hold above 10,300 zones to extend its bounce towards 10,400 then 10,500 zones while on the downside 10,200 could act as an immediate support and below that it may open the fresh decline with distress selling.

Bank Nifty formed a small candle as it was trying to hold above previous day’s opening levels but was unable to hold above immediate hurdle of 24,750 zones. However it has been forming lower top – lower bottom on weekly scale and needs to negate the same for durable bottom. The index closed 90.70 points lower at 24,527.65.

Taparia said now on immediate basis the index has to cross and hold above 24,750 zones to extend its bounce towards 25,000 then 25,250 zones while on the downside major support is seen at 24,250 zones.

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