The Nifty failed to sustain above its 200-DMA level of 3,414 in two trading sessions and closed on a bearish note. It has formed a pattern — the evening star— which is a three-candle formation that signals reversal most of the time.
The first strong candle of the formation shows bulls to be in control, pushing up the prices through buying. The second candle shows a gap-up opening and small upward movement, which signals a top in the market and the end of the uptrend where the buyers and sellers are evenly poised. The third candle gives the confirmation of a trend reversal and it extends at least half way into the first candle. This shows bears have taken control of the situation.
On Thursday, the index opened gap-up at 3,484, moved to a high of 3,511 and closed at 3,369. On Friday, it opened flat and moved to a high of 3,490 and closed at 3,384. This is a bearish candle pattern.
The trading pattern in the Nifty futures on Friday suggests profit booking in the April futures when the Nifty fell below 3,400 with build-up of long positions above 3,475 levels. This means that day traders who created long positions in a rising market, booked profits and also covered long positions when the index fell below 3,400 levels.
The Nifty has now support at 3,350 and a loss of support at these levels could see the index testing 3300 levels. However, significant unwinding in put options of the 3,200 strike and below indicates that the traders expect the Nifty may not fall below 3,200 levels in near future.
The traders were seen buying the 3,400 strike put, indicating that the Nifty has strong resistance above its 200-DMA level of 3,414.
The 3,500 strike call continues to add fresh open interest in the last few trading days as traders expect the index to face resistance above 3,500.
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