Technical View: Nifty forms bearish candle; brace for volatility in coming week

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The Nifty50 which started with a slight gap on the higher side on Friday failed to keep the momentum going as bears took control of D-Street in the second half of the trading session. The index made a bearish candle or a bearish engulfing candle type of pattern.

A bearish engulfing candle is a two-candlestick pattern which signifies that the index may be losing its current momentum. It is a pattern which consists of a small candlestick followed a big red candle which engulfs the trading range of the previous candle.

However, in Friday’s session, the intraday high of the previous trading session was slightly more than the intraday high registered on Friday. Hence, it is not an exact engulfing pattern.

The Nifty50 is now trading below its key short-term moving averages such as 5-day exponential moving average (DEMA) followed by 50-DEMA. The index consolidated throughout this week, a pattern which is likely to continue in the coming week as well unless it breaks above 10,600.

Hence, some bit of volatility in the coming week cannot be ruled out. The index has strong support near 10,270 levels. But, even a close below 10,398 could fuel more selling on D-Street.

The Nifty50 which opened at 10,596 rose to an intraday high of 10,612. It slipped more than 170 points from intraday high to hit a low of 10,434. It closed 93 points lower at 10,452 on Friday.

“The Nifty50 once again faltered after testing its 50-day EMA, whose value is present around 10,600 levels, before signing off the day with a full-blown bear candle. However, these kind of formations inside a trading are quite common and fails to attract follow-through selling,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in told Moneycontrol.

“Hence, as long as Nifty50 remains inside the trading range of 10,600–10,398 levels there will be a higher possibility of a sideways move within the said range. In the current consolidation phase of 7-day there are almost three such strong bearish candles which failed to attract follow-through sell-off, hence traders should not pre-empt a break down unless Nifty50 closes below 10,398 levels,” he said.

Mohammad further added that in the unfortunate event of breakdown correction shall get extended towards its 200-day moving average whose value is placed around 10,270 levels whereas upsides shall not be expected until indices close above 10,600 levels.

India VIX moved up by 0.38 percent at 16.37. Volatility again started to inch higher which is giving the upper hand to bears.

On the options front, maximum Put open interest stood at 10500 followed by 10000 while maximum Call OI is at 10600 followed by 11000 strikes.

Fresh and meaningful Call writing is seen at 10500, 10600 and 10700 strikes which is restricting it’s upside momentum while Put writing is shifting to lower strikes like 10400 and 10300.

“Option band signifies a lower trading range between 10,300 to 10,550 zones. The Nifty index witnessed sustained selling pressure throughout the day and finally closed near to its lowest levels by forming a Bearish Engulfing Candle on the daily chart,” Chandan Taparia, Derivatives, and Technical Analyst at Motilal Oswal Securities told Moneycontrol.

“It has been taking hurdle at its 50 DEMA from last eight trading sessions and cluster of supply is visible at 10,600-10,650 zones,” he said.

Taparia further added that if it sustains below 10,480 zones then weakness could continue towards 10,333 then 10,276 while on the upside immediate hurdles are seen at 10,550 then 10,600 levels.moneycontrol