Tech View: Nifty forms bearish engulfing pattern on the charts

Analysts on Dalal Street believe the upside may remain capped in the coming sessions.

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During the process, the index formed a big bearish candle, or large bearish engulfing kind of candle, on the daily chart after making repetitive indecisive candles in the past few sessions.
After facing resistance in the 11,300-11,350 zone for last four sessions, NSE benchmark Nifty50 finally gave up on Friday. The index shuttled between a high and low of 11,366 and 11,111 level before closing 122 points, or 1.08 per cent, down at 11,178.

During the process, the index formed a big bearish candle, or large bearish engulfing kind of candle, on the daily chart after making repetitive indecisive candles in the past few sessions. Analysts on Dalal Street believe the upside may remain capped in the coming sessions.

Mazhar Mohammad, Chief Strategist-Technical Research & Trading Advisory at Chartviewindia, said Nifty50 appears to have triggered a much-awaited correction, as the index formed a long bearish candle on the daily chart and a Spinning Top on the weekly charts, signalling indecisive nature of traders at higher levels.


Milan Vaishnav, Consulting Technical Analyst and Founder, Gemstone Equity Research & Advisory Services, said a large engulfing bearish candle has emerged on the daily charts. “This has re-established the credibility of the 11,300-11,350 zone as a strong resistance. “It has formed a minor double top on the daily chart with a lower top on the RSI. This shows the internal lack of strength,” he said.

Check out the candlestick formations in the latest trading sessions
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An engulfing candle occurs when the body of the current candle completely engulfs the body of the prior candle. A bearish engulfing candle occurs when the opening of the day is higher than the previous close, but the unanimous downtrend takes the index below the closing price of the prior candle. When such a bearish candle occurs near any resistant point or zone, it reinforces the credibility of the resistance area.
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On Friday, Nifty closed below the 11,200 level, washing out the laborious gains of past five sessions. The index settled the week 35 points lower below the August 7 close of 11,214.

Mohammad said if Nifty sustains below 11,366 level, then it should ideally head towards 10,882 level to complete one corrective structure of lower degree in terms of the Wave Theory. Meanwhile, upsides shall remain capped around 11,370 level.

“We might see mild technical pullback initially. However, the weakness in equities has been a global trend, which we saw in Friday's trade. The US dollar has been oversold and is making a bullish divergence on the lead indicators. If the Dollar Index pulls back, it may have some negative impact on equities in general and emerging markets in particular,” said Vaishnav.

As of now, Nifty is above the 100-and 50-weekly moving averages, which lay in close proximity to each other. Chartists think the 11,000 and 10,900 levels are crucial for the coming week.
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“Aggressive longs should be avoided at least in the immediate short term,” Vaishnav said.
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