Technical View: Nifty forms #39;Bearish Engulfing#39; pattern on weekly charts, rangebound trade seen

January 04
19:29 2019

The Nifty50 closed last session of the week on a strong note after a roller coaster ride, led by positive global cues and buying in banking & financials. The rally globally was driven by the news that the US and China will hold trade talks next week.

The index managed to hold 10,700 levels and formed ‘Hammer’ kind of pattern on the daily charts and ‘Bearish Engulfing’ pattern on the weekly scale. During the week, the Nifty50 slipped 1.2 percent.

The Hammer candle on a daily scale followed by Bearish Engulfing Body on weekly scale which indicates that bulls and bears both are having a tug of war. Formation of Hammer in daily suggests a bounce back move while formation of Bearish candle on weekly scale suggests multiple barriers at higher zones.

The Nifty50 after opening flat saw roller coaster ride throughout the session, and hit an intraday low of 10,628.65 & high of 10,741.05. The index bounced back sharply from lower levels in last hour of trade and recovered by more than 100 points from day’s low of 10,628 to close above 10,700 levels. It was up 55.10 points at 10,727.40.

Experts expect the consolidation trade to continue in coming sessions as long as Nifty sustains above 10,628 levels. On the higher side, the index is expected to continue to see resistance around 10,900-10,950 levels, experts said.

“Nifty50 registered a Hammer kind of formation as it smartly recouped all the losses from day’s low of 10,628 levels before signing off the session in a positive terrain but candle on weekly charts depicted a picture of Bearish Engulfing pattern,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, told Moneycontrol.

He said since the top of 10,985 registered on December 19, Nifty appears to be forming a contracting structure with lower tops and lower lows.

“Hence, in next couple of sessions we can expect a sideways move as long as the index sustains above 10,628 levels and at the same time upsides shall remain capped around 10,900 levels,” he added.

Contrary to this expectations if index breaches 10,628 then downswing shall initially get extended towards 10,530, he feels. Hence, for time being he advised traders to adopt a neutral stance and look for stock specific opportunities.

A Hammer which is a bullish reversal pattern is formed after a decline. A Hammer consists 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.

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.

On the option front, maximum Put open interest (OI) was seen at 10,500 followed by 10,000 strike while maximum Call OI was at 11,000 followed by 11,500 strikes.

Call writing was seen at 11,300 followed by 10,700 strike while Put writing was seen at 10,400 followed by 10,700 strike. Option band signifies a broader trading range in between 10,500 to 10,900 zones.

“Nifty index has been making lower highs – lower lows from last three trading sessions and needs to negate the same by holding above 10,750-10,777 zones to witness a short term bounce towards 10,850 and then 10,929 zones while a hold below the same could drag it towards its next crucial support of 10,650-10,600 zones,” Chandan Taparia, Associate Vice President | Analyst-Derivatives at Motilal Oswal Financial Services said.

Bank Nifty negated its formation of lower highs and witnessed buying interest towards 27,250 zones. It formed a bullish candle on daily scale followed by Doji candle on weekly scale which indicated that follow up is missing on either side. The index closed 235.15 points higher at 27,195.

“Now it has to hold above 26,950-27,000 zones to extend its gains towards 27,350 then 27,500 levels while on the downside supports are placed at 26,850 then 26,666 zones,” Chandan Taparia said.

India VIX fell by 3.74 percent at 16.16 levels. VIX needs to hold below 16 zones to again get a bounce back move in the market.

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