Nifty Forms Strong Bearish Candle

With profit booking across the sectors, the equity indices declined sharply on Thursday. The Nifty declined by 284.70 points or 1.16 per cent and closed at 24199.35. The Nifty Metal index was the top loser at 2.73 per cent. The Commodities and Pharma indices are down by 1.82 per cent and 1.72 per cent, respectively. Energy, Auto, Consumption, and FinNifty were down by over a per cent. All other indices declined by less than a per cent. The India VIX is up by 0.49 per cent to 14.94. The market breadth is negative as 1716 declines and 1083 advances. About 108 stocks hit a new 52-week high, and 137 stocks traded in the upper circuit. Trent, Warre Engineers, Apollo Hospital, and Hindalco were the top trading counters in terms of value.

The Nifty erased all the gains of the post-US Election outcome rally. By declining 284.70 points or 1.16 per cent, it also retraced 50 per cent of the last two days’ rally. It formed a bearish engulfing candle. Repeated occurrences of big bearish candles show the bear’s grip over the market. The gains are limited to two days only in the past two occasions of pullbacks. After last week’s tight range, the index traded in 721 points in the 2.94 per cent range in the last four days. The index closed below the 8EMA and below the previous day’s low. The 150EMA acted as support during the week. It also took the support at the prior low of 5th August. Currently, the Nifty is 3.37 per cent below the 50DMA. The Nifty has already corrected by 9.37 per cent from its top and met the 89 per cent target of the head and shoulder pattern breakdown. The index also met the 100 per cent target of the double-bottom pattern breakout on an hourly chart. The index almost tested the 20DMA on Wednesday but failed to close above this short-term resistance area. The market breadth and across-the-board selling pressure reiterated that the pullbacks in the confirmed downtrend have limited bull power. The last two days’ rally is news-driven.

Now, to resume the upside move, the Nifty must close above the 20DMA of 24,526 and form a higher high to reverse the trend. The last 10 days of price action look like a bottom formation, with a positive divergence in RSI. On Wednesday, it moved above the resistance area but failed to close above the 24,481. The RSI is back to 40 and near the bearish zone. The ADX line has flattened, and the +DMI is declining, which is an indication that bullish strength is lacking. The

As the index has formed a strong bearish candle, assume that the downtrend has resumed. A weekly close below this session’s low will confirm this. On the downside, the pattern target of 23,651 can be achieved next week. We need to watch the price behaviour around the 150EMA of 23,990. A close below this is negative. As stated earlier, the 23,526 (200EMA) is the crucial support. We cannot forecast more than this, as it is equal to the 10 per cent correction from the top also. With all probabilities, expect a consolidation or a base around this level.

(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)