Nifty forms Bearish Engulfing candle

The benchmark indices began the session with a positive gap and continued to lower in the first hour. A sharp pullback erased the initial losses. But in the last hour, aggressive selling pressure dragged the market to the day's lowest level. The Nifty declined by 195.05 points or 1.07 per cent and settled at 18113.05. All sectoral indices closed in the negative zone. The broader indices Nifty Midcap-100 and Smallcap-100 closed with 2.06 per cent and 2.45 per cent, respectively. The Nifty Realty, Auto, Metal, and Infra indices fell by 2-2.5 per cent. The Bank Nifty has declined over 650 points from its day high and erased all gains before closing flat to a negative tone. The VIX went up by 6.05 per cent and settled at 17.78. The market breadth is negative as 1630 declines and 515 advances. About 175 stocks hit their new 52-week high, and about 140 stocks traded in the upper circuit.

Our suspicion of the low-volume rally has proved right today. The Nifty tumbled by 1.07 per cent and closed below five days low. It almost filled the 12th of January gap. The Nifty formed a huge Bearish Engulfing candle at a swing high is not a good sign for the market. Tuesday's fall with huge volume confirms that the market is weakened. The index also closed below the 8EMA decisively. The broader market underperformance and the all sector participation in the sell-off is another worry for the market for now.

The index also closed well below the upward channel support line. The momentum is clearly downside now on a lower timeframe chart. The index closed below the moving average ribbon on the 75-minute chart, and the histogram shows an enormous increase in the bearish tone. Prior to the current bearish engulfing candle, the earlier swing also formed the bearish engulfing candle, resulting in a sharp decline. As the Nifty broke support liken channel line, 8EMA and closing below the five days low are the significant trend changing indications. To resume the uptrend, the index has to move above 18350. If it fails to move to the upside, the Nifty may test 17892, which is a 23.6 retracement level. The 38.2 per cent retracement level (17600) and the 20DMA (17662) are the next levels of support. Below these levels, the probability of testing the previous downward channel line.

(The author is financial journalist, technical analyst, family fund manager)