IOL Chemicals forms bearish candle after shooting star pattern; signals possible trend reversal

The stock of IOL Chemicals & Pharmaceuticals has formed a reversal ‘spinning bottom’ candlestick pattern as on March 27, 2020, and thereafter, marked the sequence of higher tops and higher bottoms. The stock has witnessed over 500 per cent upside from the low of Rs 146.30, which was registered on March 25, 2020.  

However, on the weekly timeframe, the stock has formed a reversal ‘shooting star’ candlestick pattern as on the weekend of August 28, 2020, followed by a sizeable bearish candle. This suggests a possible trend reversal in the stock. The shooting star candlestick formation is viewed as a bearish reversal candlestick pattern, which typically occurs at the top of an uptrend. The long upper shadow of the shooting star implies that the market is being tested to find out where the resistance and supply were located.

Along with this bearish formation, the stock has also managed to close below its weekly pivot and short-term moving average i.e. 20-day EMA. Among the momentum indicators, the 14-period weekly RSI has cooled off after touching the zone of 85 and at present, its reading is 69.81. The RSI is trading below its 9-week average and it is in a falling mode, which indicates further downside momentum.

Interestingly, in recent days, the price has made three higher-high but most of the indicators, including the RSI, have not reached the prior highs. The CCI has also supported the same phenomenon. The momentum is fading as the weekly MACD histogram is declining for the last 2 weeks. Moreover, the Ichimoku chart on the daily time frame is clearly giving a negative view as it closed below the KS and TS lines.

Going ahead, if the stock slips below the level of Rs 740 and trades convincingly below this level, then there is a high probability that the last week’s high point of Rs 898.90 would become a temporary top for the stock.