Index trend and stocks in action on January 21, 2020

Monday morning promised a scintillating start on D-Street as over the weekend, some of the index pivotal like Reliance Industries, HDFC Bank and TCS reported quarterly earnings and the dream of Nifty scaling to magical figure of 12,400 was about to turn into a reality as market participants perceived overall results to be a good one and reaction to these developments, was seen at the opening bell as we saw fresh highs on Nifty. However, what happened thereafter, it was no less than a nightmare for the bulls.

The bear paid a surprise visit on the D-Street and in no time, the cheerful faces had tears rolling down their face as violent sell-off was seen. Nifty lost almost 200 points from the day’s high and moreover, it ended near to 5-day low. The quantum of sell-off was so severe that the range of day had pierced the high-low range of the past five trading sessions completely. This resulted into a formation of bearish engulfing candlestick pattern.

If you read our recent articles, we had clearly warned our readers about trending move of such sort as on Friday, we spotted ID/NR4 pattern and we clearly mentioned as per the rules of Toby Crabel that low level of volatility is often followed by a sudden increase in volatility and a directional move. Also, we have been mentioning about our short-term targets being achieved on the upside.

Nifty straight from its all-time high levels has fallen towards its 20-DMA. Also, Nifty has corrected about 38.2 per cent of the recent up move from the recent swing low to all-time high levels. And as per the trend strength rules, indicated by percentage of retracement by John Hayden, 38.2 per cent retracement is considered as strong trend strength. Hence, the Monday’s low 12,216 would be keenly watched because if index fails to hold this level, it may retrace further and if it does, the trend strength ratings may shift accordingly.

On Monday, Nifty Futures recorded a distribution day as the price declined more than 0.3 per cent on volume greater than that of the prior day. The zone of 12,200-12,216 would be a good support for the index and failure to hold this support, could open doors for further correction towards gap area of January 9 (12,132-12,045).

The daily 14-period RSI which was struggling to move above the prior swing high has turned down from near 60 levels and at present, resting near 52 levels. We could see signs of range shift; however, the zone of 45-46 would be the key, as this was convinced with the higher bottom formations in the Nifty.

All-in-all, the technical structure of Nifty has been damaged as formation of large bearish engulfing candle emerging at all-time high level has a potential to mark an intermediate top for the index in the near term. However, the zone of 12,200-12,216 would be a key immediate support for the index.