Bank Nifty trades in head and shoulders pattern

Considering the daily time frame, the banking benchmark index, Bank Nifty is trading in head and shoulders pattern since the last 44 trading sessions. The head and shoulders pattern formation occurs when a market is in a bullish trend. This pattern is considered to be in a bearish reversal pattern.

The head and shoulders pattern signals a possible trend reversal. It means the formation represents the loss of faith in the prevailing trend. The right shoulder on the chart signals a possible trend reversal, as the buyers cannot push the price higher. The breakdown of neckline is the next clue that the sentiment has shifted because the price is now also making lower lows.

Going ahead, it’s important for the index to sustain and close below the neckline of the head and shoulders pattern, which is placed in the region of 30,900-30,790. A sustainable move below the level of 30,790 is likely to open up gates for further correction towards the level of 30,000. The index is currently trading below its weekly pivot and short-term moving averages, i.e. 20-day EMA and 50-day EMA. The leading indicator, 14-period daily RSI is currently quoting at 38.64 and it is trading in falling channel. The daily MACD stays bearish as it is trading below its zero line and signal line.

Derivatives data suggests that among Bank Nifty Calls, the 32,000 strike price is the most active call for the January 23, 2020, weekly expiry. Whereas, among the Bank Nifty Puts, the 31,000 strike price is the most active put for January 23, 2020, weekly expiry. For January 23, 2020 weekly series, the maximum Open Interest (OI) outstanding for calls was at 32,000 strike price and, for puts, it was at 31,000 strike price.