Technical View: Nifty forms Island Reversal pattern, further selling likely

Nifty has started the month of May and F&O series on a negative note due to selling activity sparked by rising tensions between US and China.

The index on May 4 concluded the session a tad below 9,300 and formed a bearish candle, which resembles a Bearish Island Reversal pattern on daily charts.

A Bearish Island Reversal occurs when today's high is lower than yesterday's day low and yesterday's low is higher than day before yesterday's high.

Experts expect the selling pressure to continue in coming session also if the Nifty sustains below 9,300 levels.

The Nifty50 opened with a steep fall at 9,533.50, which was also a day's low, and extended selling pressure as the day progressed to hit an intraday low of 9,266.95. The index closed at 9,293.50, down 566.40 points or 5.74 percent.

"Nifty50 appears to have reversed its trend with an Island Reversal formation perhaps owing to weak global cues which were accompanied with further extension of lockdown. The pace with which market has fallen with a huge bearish gap present in the zone of 9,731 – 9,533 is hinted at a possible intermediate top in place at the highs of 9,889 registered on of April 30," Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in, told Moneycontrol.

He feels indices are likely to remain under pressure unless they close above 9,732.

"In such a scenario all pull back attempts towards 9,500 levels shall be considered as an opportunity to create fresh short positions," he added.

Meanwhile, some support on the downside can be expected around 9,250 levels and breach of this minor support, can drag it down towards its near term critical support of 8,900 levels breach of which can confirm bigger downsides for this market, he added.

On monthly options front, maximum Call open interest was at 9,500 then 10,000 strike while maximum Put open interest was at 9,000 then 8,000 strike.

Call writing was seen at 9,500 then 10,000 strike while Put unwinding was seen at all the immediate strikes. Option data indicates an immediate trading range in between 8,800 to 10,000 levels.

"Significant Call writing with jump in Volatility index suggests that short term bounce has made a temporary top and may cause a further decline as per the global cues over the next few sessions," Chandan Taparia, Vice President | Analyst-Derivatives at Motilal Oswal Financial Services told Moneycontrol.

India VIX moved up sharply by 28.48 percent to 43.67 levels.

Bank Nifty opened on a bearish note and corrected further as the day progressed. Bears were aggressive throughout the day and dragged index below 19,700 levels intraday. It breached the Higher Highs - Higher Lows sequence of last four consecutive weeks and formed a big bearish candle on daily chart. The index closed at 19,743.80, down 1,790.70 points or 8.32 percent.

"Banking index gave a Rising Trend line breakdown on daily chart and closed below the same, which is a negative sign. RSI oscillator also gave a negative crossover with its average on daily chart," Chandan Taparia said.

Going forward, a hold below 20,000 levels could see a fall towards 19,000 - 18,700, while resistance is now placed at 20,500 then 21,500 levels, he added.