Technical View: Nifty forms large bearish candle, 21,860 crucial for further sharp correction

The Nifty 50 has seen the biggest single day fall in last seven weeks and formed large bearish candlestick pattern on the daily charts on March 13, tracking steep correction in the broader markets on overvaluation concerns recently raised by the market regulator. This was despite stability in the global counterparts.

Given the decisive breakdown of upward sloping support trendlines as well as 21-day EMA (exponential moving average), the index is likely to consolidate wtih negative bias. But if the index breaks 21,860, the important level for breakdown of higher highs, higher lows formation, then further sharp correction towards 21,500 can't be ruled out in following sessions, experts said, adding in case of rebound 22,200-22,300 are the levels to watch.

After initial upmove, the Nifty 50 remained under pressure and in fact, extended southward journey as the day progressed to close tad below psychological 22,000 mark. The index fell 338 points or 1.51 percent, the biggest single day fall since January 23 this year, to close at 21,998.

"The way, Nifty declined from near all-time high of 22,526 levels recently, it is indicating a possible formation of important top reversal pattern at all-time high," Nagaraj Shetti, senior technical research analyst at HDFC Securities said.

The bullish pattern like higher tops and bottoms continued on the daily chart and present weakness could be in line with the new higher bottom formation. But a decisive move below 21,860 levels (last higher bottom of February 29) could negate this bullish setup and that could eventually form a bearish pattern like lower tops and bottoms, Shetti feels.

Follow-through weakness from here is expected to drag Nifty down to 21,500 levels in the near term, while immediate resistance is at 22,250 levels, Nagaraj said.

On the weekly options front, the maximum Call open interest was seen at 22,500 strike, followed by 22,400 & 22,300 strikes, with meaningful Call writing at 22,300 strike, then 22,400 & 22,200 strikes. On the Put side, the 21,700 strike owned the maximum open interest, followed by 21,500 & 21,800 strikes, with writing at 21,700 strike, then 21,500 & 21,600 strikes.

The above options data indicated that 21,800-21,700 is expected to be next support for the Nifty 50, with resistance at 22,200-22,300 levels.

Bank Nifty

The Bank Nifty has fared a bit better than benchmarks as the fall was less than Nifty 50, declining 301 points to 46,981. The index has formed bearish candlestick pattern on the daily charts with continuation of lower highs, lower lows formation for third consecutive session, but defended 21-day EMA (46,946).

If the index manages to defend the same then the bounce back can be a possibility, otherwise the index may break 46,500, experts said.

"With participation coming in from Key heavyweights like ICICI Bank, HDFC Bank and Kotak Mahindra Bank, we expect it to hold on to the support zone 46,900 – 46,700 and recover," Jatin Gedia, technical research analyst at Sharekhan by BNP Paribas said.

The broader markets caught in to complete bear trap on Wednesday as the Nifty Midcap 100 and Smallcap 100 indices corrected 4.4 percent and 5.3 percent, respectively, given the pathetic breadth.

About 23 equity shares declined against one rising share on the NSE.

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