Nifty trend and stocks in action on October 01, 2020

One of the key assumptions in technical analysis is that history tends to repeat itself. This was clearly visible in Wednesday’s session as the day’s session index movement was very much similar to the last session, except the fact that the index closed in the green on Wednesday.

The price action of the day formed a Doji candlestick pattern, which indicates a sense of indecisiveness in the market. Further, the low of the prior bar was protected and as a result, there was a formation of a higher low as compared to its prior bar, while the high was lower than the previous bar’s high, which resulted in a formation of an inside bar (ID). Also, the daily range of the candle was 111 points, which is the lowest in the last seven bars, and hence, this was an NR7 bar. So summing up above all the patterns Nifty has formed an ID/NR7/Doji. The formation of this pattern indicates a day with low volatility as well as a contraction. In addition to this, there is a contraction witnessed on the 60-minute timeframe as well as Bollinger Band contracting. And according to Toby Crabel, the low level of volatility is often followed by a sudden increase in the volatility and a directional move. 

The formation of the above-mentioned pattern, just ahead of the weekly expiry, is a clear sign that we are likely to see a volatility expansion phase on the expiry day. Hence, the high and low, which stands at 11,295 and 11,184, respectively, is crucial to watch out in the coming session and as per the rule, break on either side of the range could result in a trending move.

Let us compare the current leg of the pullback with the pullback seen between September 9 and 16 (11,185 -11,618), which retraced almost 61.8 per cent of its fall and the swing lasted for almost five trading sessions. The current pullback rally has also retraced about 61.8 per cent of its fall and the swing is four days old. However, would Thursday’s session cause an end of the current pullback? It seems so, as time-wise, we would have symmetry between the current and the last pullback along with the bears, which have failed to move above the 50-DMA in the last two trading sessions. The only point which is favouring the bulls is that they have sustained above the 11,200 mark. So, Thursday’s session would be a decisive day for the index.

The 50-DMA (11,306) and the 20-DMA (11,320) are at a converging point. Usually, when a short-term moving average crosses below the longer-term moving average, it indicates that the trend is shifting down.

Overall, Thursday could be a trend decider day and volatility could be seen as generally, a contraction in the range is followed by an expansion in the range. Thus, traders are advised to set their eyes on the level of 11,295 and 11,184.

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