Technical View: Nifty forms Bearish Engulfing pattern on weekly charts, create fresh shorts

The Nifty50 wiped out the gains of the previous two days and plunged nearly 200 points on September 4, tracking weakness in global markets and concerns over the US’ economic recovery.

The index started the day lower at 11,354.40 but recovered to rise to 11,452.05 only to fall to touch an intraday low of 11,303.65 in the last hour. It signed off the session at 11,333.90, down 193.60 points or 1.68 percent.

The index formed a small-bodied bearish candle that resembles a Doji pattern on the daily chart as closing was near the opening level.

On the weekly scale, it formed a bearish engulfing pattern as it ended the week 2.7 percent lower.

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.

The Nifty managed to hold on to the crucial support of 11,300 but a decline in the coming session can lead to sharp selling pressure, experts said.

Traders should create fresh short positions on a bounce into the 11,350 –11,390 zone with a stoploss above 11,400 on a closing basis, Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory at Chartviewindia.in told Moneycontrol.

“A perfect Bearish Engulfing formation on weekly charts with a new corrective swing low, ie below the low of 11,325 registered on August 31, on daily charts along with a close below 20-day exponential moving average is clearly confirming that trend might have decisively reversed in favour of bears," he said.

Unless the index closes above 11,584, all the rallies should be used to create short positions, he said.

On the downside, if it index breaches 11,300 in the next session, then the Nifty can fall initially towards 11,111 with the eventual target placed around 11,000, he said. A close above 11,450 would be considered as an initial sign of strength.

India VIX moved up by 8.06 percent to 22.15 levels. "A spike in VIX after the dips of last three trading sessions indicates that the short-term volatile swing could be back in the market for the next few trading sessions," Chandan Taparia, Vice President | Analyst-Derivatives at Motilal Oswal Financial Services said.

Following the correction, the options data indicated that the immediate broader trading range for the Nifty shifted downwards to 11,100-11,600 against 11,200-11,800.

On the options front, maximum Put open interest was at 11,000 followed by 11,500 strike, while maximum Call open interest was at 11,500 followed by 12,000 strike. Marginal Call writing was seen at 11,500 then 11,600 strike while Put writing was seen at 11,000 then 10,500 strike.

The Bank Nifty opened in the red at 23,119.15 and drifted lower to hit the day's low of 22,876.9. However, it witnessed a bounce towards 23,400 but failed to fill its opening gap and was quickly sold into by falling back towards the day's low.

The index closed at 23,011.50, down 519.30 points or 2.21 percent, and formed a bearish candle on the daily scale and a Dark Cloud Cover formation on the weekly chart.

"The weekly pattern formation gives an early threat to the bulls with an early sign of negative crossover on mechanical indicators. Now a hold below 23,400 levels could drag the rate-sensitive index towards 22,400 levels while key hurdle is seen at 24,000," Taparia said.

Positive setup was seen in Maruti Suzuki, Ashok Leyland, PVR, TCS and Siemens while weak structure was seen in Piramal Enterprises, ICICI Prudential Life, Page Industries, Ambuja Cements, etc, he added.