Technical View: Nifty forms Hanging Man pattern, experts say avoid long positions

The Nifty50 snapped its five-day winning streak as the took control of Dalal Street on July 22, as US-China tensions and a surge in COVID-19 infections weighed on sentiment. FMCG, IT, PSU banks and auto stocks came under pressure.

The index failed to hold on to 11,200 levels and formed a bearish candle that resembled a Hanging Man pattern on daily charts.

A Hanging Man is a bearish reversal candlestick pattern, usually formed at the end of an uptrend or at the top (around 555-point rally in the previous five consecutive sessions). In a perfect 'Hanging Man' pattern, there is a small upper shadow or no upper shadow at all, a small body and long lower shadow.

The pattern generally indicates that the bears can get dominance, which is possible if the index corrects sharply in the coming session, experts say.

Overall, volatility is still at comfortable levels (below 30-mark), which can support the bullish stance with a higher market base. India VIX moved up by 1.86 percent to 24.88 levels.

For the time, traders should avoid long positions and positional traders with a high-risk appetite should consider shorts if the Nifty trades below 11,000-mark, Mazhar Mohammad, Chief Strategist–Technical Research & Trading Advisory at Chartviewindia.in, said.

The Nifty50 opened sharply higher at 11,231.20 and hit an intraday high of 11,238.10 but immediately turned volatile to touch the day's low of 11,056.55 though it recovered some of the losses in late trade. The index finally settled at 11,132.60, down 29.70 points.

"The Nifty50 registered a Hanging Man kind of formation, hinting that the ongoing uptrend may be on the verge of extinction, though confirmation is required with a follow-through selling in the next trading session," Mohammad said.

"As trend appears to be weakening with narrow intraday ranges followed by today's bearish candle, a close below 10,990 shall be considered as an initial sign of weakness, whereas a close below its 200-day simple average, whose value is placed at around 10,863 shall confirm a trend reversal in the favour of the bears," he said.

In that scenario, initial targets on the downsides can be towards 10,560 levels, he added.

Contrary to this, he feels, if the Nifty closes strong above 11,238 levels with a wide intraday trading range, then it can take the index towards 11,400.

The options data continued to indicate that the Nifty could remain in an immediate trading range of 10,800 to 11,300.

On the options front, maximum Put open interest was seen at 10,000 followed by 11,000 strike, while maximum Call open interest was at 11,500 followed by 11,000 strike. Call writing was seen in 11,200 and 11,500 strikes, while Put writing was seen at 11,000 and 11,100 strike.

The Bank Nifty opened gap up at 23,159 and made a swing high of 23,211 but failed to hold gains at higher zones and drifted lower to hit an intraday low of 22,658.20.

The index closed at 22,882.60, up 100.60 points, and formed a small bearish candle on the daily scale,  as the closing was below its opening levels, but the structure of higher highs -higher lows was intact.

"It consolidated in a wider range of 22,650 to 23,000 levels for the most part of the session as selling pressure was seen at higher levels while buying interest at lower zones," Chandan Taparia, Vice President | Analyst-Derivatives at Motilal Oswal Financial Services, said.

"Supports are gradually shifting higher and till it holds above 22,500 levels, it can witness an upmove towards 23,000 then 23,250-23,500 while on the downside, supports are seen at 22,500 then 22,250 levels," he added.