Last week, Nifty scaled to a new lifetime high, right at the beginning; however, concerns about the second wave of Coronavirus triggered a sell-off. As a result, Nifty fell for the fourth consecutive trading session and ended its two-week winning streak, dropping by 1.20 per cent. The broader indices i.e. Nifty Mid-cap and Small-cap outperformed with gains of 0.90 per cent and 0.6 per cent, respectively. On the sectoral front, PSU Bank jumped 10.7 per cent. Buying was witnessed throughout the week from FIIs, but there was a gradual decline in FIIs buying on Friday.
Technically, the index had formed a bearish engulfing candle on the weekly chart. The bearish engulfing pattern is a two-candle reversal pattern. The first candle has a small real body, which reflects a dissipation of the prior trend’s force while the second bear candle, whose body is greater than the first, proves an increase in force behind the new move. However, for any bearish implication, it will need confirmation on the next bar.
Earlier, whenever it formed a bearish engulfing pattern at a lifetime high, Nifty witnessed decent corrections. In January 2018, it had corrected nearly 11 per cent while in September 2018, it corrected about 15 per cent. Last year, in January 2020, after forming a bearish engulfing pattern at a lifetime high, the index witnessed one of the fastest bear markets in history as it fell about 40 per cent. There was another bearish engulfing in May 2018 and August 2020 at swing highs, not at lifetime highs. However, these were unsuccessful.
One of the most important assumptions in technical analysis is that history repeats itself! If the history repeats this time, expect an average correction of 12-13 per cent and if this happens, then there is a high probability that we could test the levels of 13,596, which also happens to be the swing low of January 29.
Currently, there are six distribution days. Any increase in distribution day counts as a breach of 20-DMA that changes the market structure to ‘uptrend under pressure'. For the coming week, the levels of 14,750 would act as an immediate support level and a breach of this level could take the index towards the gap area of February 2.
On the other hand, rallies towards the levels of 15,180-15,200 could act as a resistance level. Overall, the coming week would decide the fate of the markets.