Is Fridays bearish outside bar on Nifty, a harbinger of bad times?

The week gone by was a very interesting one as in each session, Nifty witnessed a gap-up opening.  

Barring Friday, post the gap-up, the index did not see any major action and kept oscillating within a range by maintaining its positive stance. Despite a massive sell-off witnessed on Friday, Nifty ended the truncated week with a net gain of about 93 points or 0.62 per cent.   

The price action of Friday formed a bearish outside bar and the formation of bearish outside bar after a series of a small-bodied candle has undoubtedly fanned the flames that the index might witness a reversal from here on. However, in markets, a larger timeframe is of utmost importance and hence, it’s important to check a larger timeframe to get a sense of where the markets are headed. Further, in the current uptrend, we have seen that the index has formed bearish outside bar, a number of times and we would analyse the price action after the formation of a bearish outside bar to get the sense of whether we would witness a reversal or not?   

In the recent past, there were four instances where Nifty has formed a bearish outside bar as on January 29, 2021, December 21, 2020, November 25, 2020 and October 15, 2020. In each of these instances, there has been no follow-through selling witnessed in the markets as we had seen the formation of an inside bar or a trap. Hence, if we go by the underlying assumption of technical analysis that history tends to repeat itself, we might again see a formation of an inside bar on Monday.   

On the weekly timeframe, Nifty has formed a candle, which resembles a gravestone Doji and the emergence of such a Doji candlestick pattern near the high point may signal to disrupt the current uptrend. However, if we compare the last week’s candle with the prior week’s candle, we will notice that the candle carries a higher high & higher low formation. At the same time, the closing of the last week’s candle is greater than the previous week’s candle, which indicates a phase of a breather.  

Meanwhile on the daily chart, Nifty is trading above the rising 50-DMA while the 50-DMA has acted as sheet anchor support for the index in the recent past. As long as the index is above this level, corrections may be short-lived. The 50-DMA is placed at 14,680 and this level should be an important support level for the index in the near term.   

Overall, the index is at an important juncture and the breach of 50-DMA would result in a trend reversal. However, as long as the index stays above the sheet anchor support, one may expect stock-specific action to continue.