False breakout: Nifty fails to hold on to 11,000-level; experts advise caution
Bears pushed the index below its crucial support at 11,000, and 5-days exponential moving average (EMA) last week which raised questions of a possible ‘false breakout’.
Chartists name it a false breakout when price of a security or an index temporarily moves above a crucial resistance level, but then later slips below that level and comes back at the same level where it started.
In the past 4-5 months, most experts were talking about the magical levels of 10,985-11,000 which were acting as crucial resistance levels, and a close above the same could push the index towards higher levels of 10,300 and possibly 10,400 levels if the momentum continues.
The index breached on the downside the crucial support of 11,000 in September 2018, and this is the fourth time since then the Nifty retested and failed to hold onto the magical number, data showed.
Most experts advise traders to remain cautious and trend remains to be on the downside as long as index trades below 11,041 which is the intraday high formed in Friday’s trading session. Lack of triggers might push index towards lower level of 10,500-10,600, suggest experts.
But, if bulls managed to push the index back above 11,000-11,061 levels then short coverings could well push the index towards higher levels, they say. But, till then the trend is likely to remain sideways, and global cues will play an important role in charting short term direction for Indian markets.
“Despite the up move witnessed in the markets we were of the view that it was still a counter trend rally, due to overlapping chart structure, which is expanding on the upside. Post Friday’s price action recent breakout appears to have failed there by once again pushing the Nifty into the erstwhile trading range of 11,000 – 10,500 kind of levels,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in told Moneycontrol.
“Hence, we will not be surprised if Nifty eventually heads towards 10,500 kinds of levels. With events like budget, earning season, monetary policy getting over the market lacked sufficient triggers. Besides, with the passage of every day we are heading close to a major event in the form of general elections which will add more uncertainty to the markets going forward,” he said.
Mohammad further added that when big money (money from fund managers or FIIs) stops flowing into the markets it will create trading ranges. Technically speaking, bulls can expect some strength only on a close above 11041 levels. Till then trend shall remain sideways with a negative bias.
On the daily charts, the Nifty had an eventful week. It registered bullish candles in the first three trading session of the week before recording a Doji candle on the daily charts which was followed by a large bearish candle on Friday.
In terms of the candlestick patterns, the price action over the last three sessions has resulted in an ‘Evening Star’ formation, suggest experts.
Evening Star is a bearish, top trend reversal pattern that is formed taking three candlesticks and is considered as a potential reversal of an uptrend. The pattern consists of three candlesticks, with the middle candlestick being a star.
On the daily charts, the Nifty formed a bullish candle which was followed by a Doji kind of pattern on Thursday and a strong bearish candle on Friday which closed below Wednesday’s low of 10,962.
“The price action over the last three sessions has resulted in an Evening Star formation. Also, the pattern has been formed post completion of an Ending Diagonal pattern. This increases the bearish significance of the candlestick pattern,” Gaurav Ratnaparkhi, Senior Technical Analyst, Sharekhan by BNP Paribas told Moneycontrol.
“The Fibonacci retracements reveal that the benchmark index has reversed from the 61.8% retracement of the September – October decline. Hence the Nifty seems to have topped out at the recent high of 11118,” he said.
Ratnaparkhi is of the view that on the way down, the Nifty has broken the key support zone of 10,980-11,000 on closing basis. “Thus the traders can add to the position on the short side. From short term perspective, 10,583-10,534 shall now be the key target area to watch out for with potential to head significantly lower,” he added.