Formation of three black crows & closing below 21-DMA become ominous sign for Nifty!

Markets went on another rollercoaster ride on Monday as Nifty witnessed a trade with a range (high to low) of 273 points, which was one of the highest daily range seen in over a month and well above its 10-day average range. 

Nifty opened the session with a gap-up and hit an intraday high of 14,491. However, soon after that, it turned volatile and traded with a negative bias for the majority part of the day. At close, it ended the day with a loss of 133 points at 14,238.90. The heavyweight Reliance Industries was one of the major culprits as it single-handedly contributed 84 points to the fall.  

The price action formed a bearish candle, carrying lower high & lower low. If we combine the price action of the last three trading sessions, it resulted in the formation of 'three black crows pattern'. The formation of this pattern is considered as a bearish reversal pattern. Along with this bearish reversal pattern, the index has witnessed a breakdown of the three-month-long upward rising trendline and at the same time, it breached its 21-DMA for the first time in three months.   

Talking about the indicators, the RSI, which is one of the popular momentum indicators, had marked a bearish divergence at the top along with a classical bearish failure swing. Now, the RSI has slipped below the major swing low of December 21, which is an ominous sign. The daily MACD is bearish as it trades below the signal line. The MACD histogram and negative movement indicator –DMI shows an increasing bearish strength. The only solace on the indicator front is that the positive directional indicator (+DI) is yet to move below the 25-mark as after moving above the 25-mark in the early November, it is yet to close below this mark.   

Talking about the levels on Nifty index, immediate support is seen at 14,100-14,040 levels. A breach of this support level would open gates for a further correction towards the levels of 13,800-13,751. The zone of 13,800-13,751 is a very crucial support level as it is a confluence of 61.8 per cent retracement level of the recent rise and also because the gap area of January 28 is placed in this region. On the upside, the 21-DMA is likely to act as an immediate resistance, which is placed at 14,288 levels, followed by 14,500. With the monthly F&O expiry and Union Budget on the horizon, the volatility is likely to surge. Our advice to traders would be to tighten your stop-losses and follow risk management rules to weather the storm of volatility. Going ahead, the outcome of the Union Budget could be a fresh trigger point for the market direction.