Technical View: Nifty forms Bearish Engulfing pattern, further correction towards 19,500 likely

Nifty corrects over 100 points and formed bearish reversal pattern

The Nifty50 wiped out all its previous day's gains and fell sharply to close below 5-day as well as 10-day EMAs (exponential moving average) on July 27, the monthly F&O expiry day, as market participants may have become worried after one more rate hike signalled by the US Federal Reserve. The index has formed Bearish Engulfing candlestick pattern on the daily charts, which is a bearish reversal pattern.

We have seen correction in banking & financial services, auto, oil & gas, FMCG and select IT stocks, but pharma and realty sectors outperformed smartly with three percent and two percent gains, respectively.

The Nifty50 opened higher at 19,851 and climbed up to 19,868, but lost all gains after initial couple of hours of trade and corrected sharply up to 19,606. The index finally settled with 118 points loss at 19,660, below the 10-day EMA (19,674), which acted as a support in the recent past.

Now, the 20-day EMA or 19,500 can be the level to watch, which can act as a crucial support in near term, as breaking of the same can open doors for correction up to 19,300 mark, whereas the 19,700-19,900 can be hurdles on the higher side, experts said.

"A long bear candle was formed on the daily chart with minor lower shadow. Technically, this market action indicates reversal pattern after a small rise. Currently, Nifty closed below the immediate support of 10-day EMA at 19,680 levels, which is after sustaining above it for 21 consecutive sessions," Nagaraj Shetti, technical research analyst at HDFC Securities said.

For further weakness from here, the market could slide down to its crucial lower support of 20-day EMA around 19,500 levels, he feels. This moving average has been offering support for the Nifty since past three months.

However, any rise from here could find strong resistance at 19,850 levels, he said.

After today's correction, we have seen the resistance and support shifting lower. The Options data indicated that 19,700-19,800 can act as resistance levels for the Nifty, whereas 19,600 may be immediate support, followed by 19,500 levels.

We have seen maximum Call open interest at 19,700 strike, followed by 19,800 strike and 20,000 strike, with meaningful Call writing at 19,700 strike, then 19,600 strike. On the Put side, the maximum open interest was at 19,600 strike, followed by 19,500 strike, with writing at 19,600 strike, then 19,500 strike.

Bank Nifty

Bank Nifty tried to go near its record high levels and hit a day's high of 46,310 after opening at 46,286, but could not sustain those gains for long and fell more than 700 points from intraday high to day's low of 45,571.

The bank index recouped some losses and closed with 383 points loss at 45,679, forming Bearish Engulfing candlestick pattern on the daily scale, which raises possibility of further correction.

"The daily momentum indicator has triggered a fresh negative crossover which is a sell signal. Thus, until the Bank Nifty does not manage to sustain above the 46,300 – 46,400 zone we can expect it to slip down to 45,330 – 45,300 levels where support in the form of the 20-day moving average is placed," Jatin Gedia, technical research analyst at Sharekhan by BNP Paribas said.

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