Chandan Taparia of Motilal Oswal Financial Services said candle setup suggest overall weakness but daily setup suggests that meaningful dips could be bought.
The Nifty50 managed to trim losses in the second half and closed off day's low amid weak Asian cues on Friday, but the broader markets caught in complete bear trap as the Nifty Midcap and Smallcap indices were down a percent each.
The index registered a bearish candle, which resembles a Hammer kind of formation on the daily charts and 'Bearish Belt Hold' pattern on the weekly scale.
Hammer formations on daily charts should have bullish connotations for the near term, but traders need to be cautious as weakness on weekly charts is getting more pronounced, experts said.
A 'Bearish Belt Hold' pattern is formed when the opening price becomes the highest point of the trading day (intraday high) and the index declines throughout the trading day making up for the large body. The candle will either have a small or no upper shadow and a small lower shadow.
A Hammer which is a bullish reversal pattern is formed after a decline while a Hanging Man is a bearish reversal pattern. A Hammer consists of no upper shadow, a small body, and long lower shadow. The long lower shadow of the Hammer signifies that it tested its support where demand was located and then bounced back.
The Nifty50 after opening moderately higher managed to hit an intraday high of 10,785.75 in early trade itself, but immediately bears took the control of Dalal Street and the index fell up to 10,620.40 in afternoon, followed by a bit of recovery in second half of session. The index cut down losses and closed down 21.60 points at 10,724.40.
"It was heartening to see Nifty50 staging a pull back move from the critical supports, placed around 10,600, as it recouped all the intraday losses which resulted in a Hammer kind of formation with a long lower shadow but weekly charts depicted a Bearish Belt Hold formation as Nifty continued to remain under pressure throughout the week from the highs of 10,930," Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in told Moneycontrol.
He said usually Hammer formations on daily charts should have bullish connotations for the near term provided in the immediate session market witness a follow through buying.
In such a scenario sustaining above 10,700 levels on closing basis Nifty should ideally target 10,900 levels, he added.
However, he said, as weakness, on weekly charts, is getting more pronounced, traders need to remain cautious and maintain a tight stop for all their long positions below 10,650 on closing basis as breach of this level has the potentiality to trigger a fresh sell off with targets placed around 10,380 levels.
India VIX moved up by 3.91 percent to 16.39 levels. On the option front, maximum Put open interest (OI) was at 10,700 followed by 10,400 strike while maximum Call OI was at 11,000 followed by 10,900 strike.
Put writing was seen at 10,300 followed by 10,500 strike while Call writing was seen at 10,700 then 10,800 strike.
Option band signifies a lower shift in the trading range in between 10,650 to 10,929 levels, experts said.
"Nifty index has been making lower highs - lower lows from last six trading sessions and needs to negate the same to get the sign of short term trend reversal after the recent decline of around 500 points from its swing high of 11,118 marks," Chandan Taparia, Associate Vice President | Analyst-Derivatives at Motilal Oswal Financial Services Limited told Moneycontrol.
He said candle setup suggest overall weakness but daily setup suggests that meaningful dips could be bought.
"Now it has to negate the formation of lower highs by moving above 10,785 to witness a bounce towards 10,850 then 10,929 zones while on the downside support exists at 10,630 then 10,580 zones," he added.
Bank Nifty formed a Bearish candle on weekly and daily scale and drifted towards major support area of 26,666 zones. The index closed at 26,794.25, down 176.35 points.
"It has been making lower highs - lower lows from last six trading sessions and needs to negate the same to get a short term reversal," Chandan said.
Now if it manages to hold 26,850 zones then bounce could be seen towards 27,000 then 27,150-27,350 zones while support seen at 26,666 then 26,400 zones, he added.
