Technical View: Nifty forms ‘Hammer’ like pattern; remain long with a stop below 10,240

The Nifty50 which opened with a slight gap on the downside on Friday managed to recoup most of the losses as bull pushed the index back above 10300 towards the close of the trade making a ‘Hammer’ like candle on the daily candlestick charts.

The Nifty50 bounced back after retesting its crucial 20-days exponential moving average (DEMA) placed at 10,284 for second consecutive day in a row which indicates the formation of a bottom, which still requires confirmation.

A perfect ‘Hammer’ pattern is formed when the index trades significantly lower than its opening price for the most part of the trading day but manages to recoup losses and close either above or lower than its opening price.

The candle appears like a hammer in which the body is at least half the size of the tail. Hammer is a bullish reversal pattern and often implies that market might be nearing a bottom.

However, traders should not make decisions based on one candlestick pattern and wait for further confirmation. A positive close in the next trading session could confirm the bottom. Investors with long positions should continue with long bets with a stop below 10,240.

The Nifty50 index opened at 10,304 plunged below its 20-DEMA to hit its intraday low of 10,254. But, bulls managed to regain control and took the index to hit an intraday high of 10,344. It closed 12.80 points higher at 10,321.75.

“Albeit market remained choppy and volatile for the day key take away from intraday price behavior can be the fact that markets recovered and closed at the higher end of the trading range to register Hammer kind of formation,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in told Moneycontrol.

“This positive close despite wild swings in both directions is suggesting that bulls are working hard to hammer out a short term bottom. Hence, any positive close in next trading session shall not only generate buy signals on lower time frame charts but also can result in a sustainable rally for a couple of trading sessions,” he said.

Mohammad further added that traders are advised to focus on select pockets of opportunities which are delivering well for the bulls irrespective market condition.

“It looks prudent to maintain a market stop below 10240 levels on closing basis. On a pullback attempt target can be close to 10442 levels,” he said.

India VIX moved up by 1.54 percent at 13.47. A rise in VIX suggests that volatile swings are likely to continue in the market and VIX has to cool down to get the market stability.

On the options front, maximum Put OI is shifting at 10200 followed by 10000 strikes while maximum Call OI is at 10500 followed by 10400 strikes. Significant Put writing was seen at 10300 and 10100 while Call writing was seen at 10300, 10450 and 10500 strikes.

“The Nifty formed a Hammer candle after the recent correction of 236 points from 10490 to 10254. It has been making lower highs – lower lows from last four trading sessions and now needs to negate the same to get the stability and buying interest,” Chandan Taparia, Derivatives and Technical Analyst at Motilal Oswal Securities told Moneycontrol.

“Now, the index has to hold above 10350 to witness an up move towards 10380 then 10450 while on the downside supports are seen at 10300 then 10250 levels,” he said.