Technical View: Nifty forms #39;Bearish Engulfing#39; pattern, consolidation likely after sharp fall

October 17
17:29 2018

Bears took charge on Dalal Street on Wednesday after rallying for previous three consecutive sessions. The Nifty50 failed to hold its strong gap up opening and slipped sharply in afternoon trade to close below the 10,500 levels.

The index lost more than 100 points and formed ‘Bearish Engulfing’ pattern on the daily candlestick charts.

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 Nifty index opened gap up with 104 points gains at 10,688.70 to hit an intraday high of 10,710.15, but failed to hold it gains and corrected sharply in afternoon trade to hit day’s low of 10,436.45. It witnessed selling pressure at its resistance of 10,650-10,700 zones and corrected by 257 points from its intraday high.

The index closed well below its psychological 10,500 levels, down 131.80 points or 1.25 percent to 10,453.

“Nifty50 registered a ‘Bearish Engulfing’ formation as bulls caved in to the forces of bears after the strong gap up opening. This kind of behaviour especially from a critical resistance level is suggesting that market might have completed its upward corrective move at Wednesday’s high of 10710 levels and ideally should resume its down move going forward,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, told Moneycontrol.

He said in such a scenario the logical targets for this downswing shall be placed below 9,950 levels to culminate the corrective structure.

He feels the Nifty50 shall not gain further strength unless it closes above 10,710 levels going forward.

According to Mazhar, in next session if it manages to sustain above 10,436 levels then the said index can consolidate for couple of sessions and bulls can make one more attempt towards 10,700 levels which shall be an ideal opportunity to create fresh shorts.

Contrary to this breach of 10,436 shall quickly lead to the test of recent low of 10,138 levels which should eventually get breached, he said.

Equity markets will remain shut on Thursday for Dussehra festival.

India VIX moved up by 3.54 percent to 17.98. Spurt in volatility after the dips of last four sessions suggests that upside could be restricted again in the market, experts said.

On option front, maximum Put open interest (OI) is at 10,000 followed by 10,400 strike while maximum Call OI is at 11,000 followed by 10,700 strikes. Meaningful Call writing was seen at 10,700 followed by 10,500 while Put unwinding was seen at all immediate strikes. Option band signifies a trading band between 10,300 to 10,600 zones.

Chandan Taparia, Associate Vice President | Analyst-Derivatives, Motilal Oswal Financial Services also said the Nifty formed a ‘Bearish Engulfing pattern on daily scale which indicates that bears are again pushing the market from higher levels.

Now if it fails to surpass immediate 10,550-10,600 zones then profit booking may take it towards next support of 10,350 zones, he feels.

Price set up at current juncture suggests that index may remain volatile as after the recovery of 500 points from recent swings lows, it is again finding hurdles at key resistance area, Taparia said.

Bank Nifty opened positive but failed to cross 26,000 zones and corrected sharply towards 25,100 zones. The index closed 401.05 points lower at 25,188.60.

“It formed a ‘Long Bearish Engulfing Candle’ on daily scale which suggests are bears are putting pressure at higher levels. Now till it holds below 25,500 zones, it can drift towards next support of 25,000 then 24,650 zones while on the upside hurdle is seen at 25,650 level,” Taparia said.

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