Technical View | Nifty forms bearish Engulfing pattern, further weakness likely

The Nifty50 lost all its early gains and remained under pressure for the rest of the session on December 9 despite the positive trend in global counterparts. Technology, metal, PSU banks and oil & gas stocks pulled the Nifty50 tad below the crucial support of 18,500 which was being held for several days.

The index has formed a bearish Engulfing pattern on the daily charts, indicating the possibility of further weakness in the coming sessions.

A Bearish Engulfing is a two candlesticks pattern. 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.

If the index decisively fails to get back above 18,500 then further selling pressure towards 18,400-18,300 can be seen in the coming days, but on the higher side, 18,600-18,700 is expected to be a crucial resistance area, experts said. Traders also seem to be cautious ahead of the next big event - the FOMC interest rate decision due next week.

The Nifty50 opened higher at 18,662, but after an initial hour of gains, lost all its gains and corrected up to 18,410 in the afternoon, which can be a crucial level for further downside. The index finally settled with 113 points loss at 18,497.

The index fell more than a percent during the week and formed a bearish candle on the weekly scale.

"The lower top formation on intraday charts and bearish candle on weekly charts is indicating further weakness from the current levels," Amol Athawale, Deputy Vice President - Technical Research at Kotak Securities said.

For short-term traders, he feels the 20-day SMA (simple moving average) or 18,450 would act as a sacrosanct support zone.

"Below 20-day SMA, further sell-off is possible till 18,300-18,200, whereas above 18,450, we could expect a one pullback rally till 18,700," the market expert said.

The Option data indicated that the expected near-term trading range for Nifty50 would be 18,300-18,700 levels.

We have seen maximum Call open interest at 19,000 strike, followed by 20,000 strike & 18,700 strike, with Call writing at 18,500 strike, then 18,600 strike, while the maximum Put open interest was seen at 18,000 strike, followed by 18,500 strike, with Put writing at 17,500 strike, then 18,700 strike.

The volatility index India VIX inched up marginally to 13.48 level, from 13.40 level, but having it on the lower side, experts are not too worried about current correction and consolidation.

Bank Nifty50 opened sharply higher at 43,765 and climbed further to hit an all-time high of 43,853.40. The banking index lost all its gains in the afternoon, but recouped all those losses in late trade and closed with 37 points gains at 43,633, forming a bearish candle on the daily charts.

However, on the weekly basis, Bank Nifty maintained higher highs higher lows for the fifth week in a row and formed a bullish candle on the daily charts. It outperformed broader markets and gained more than one percent during the week.

"The Bank Nifty index witnessed some selling pressure at higher levels where fresh short positions were built up. The index is still trading in a broad range between 43,000 and 44,000 where a significant amount of Put and Call writing have been witnessed respectively," Kunal Shah, Senior Technical Analyst at LKP Securities said.

The index must decisively breach the range for a trending move on either side, he feels.

The broader markets, too, were under pressure with the Nifty Midcap 100 and Smallcap 100 indices falling 0.4 percent and 1.1 percent, respectively.