Bearish engulfing pattern in Nifty50; Are these early signs of a bearish phase?

In the volatile world of financial markets, where indices often set new highs only to witness sharp corrections, the Nifty 50 and Sensex experienced a notable retreat after reaching all-time highs of 22,124 and 73,427, respectively. The subsequent week saw a decline of nearly 4.5%, prompting investors to scrutinize the charts for technical patterns and market factors influencing this shift.

Technical analysts have identified a significant bearish engulfing candlestick pattern on the weekly chart of Nifty 50 at its all-time high. This pattern, consisting of two consecutive candlesticks, signals a potential reversal from an uptrend to a downtrend.

Investors are closely monitoring the current week’s candle, and if it closes below the low of the previous week, it may pave the way for a minor corrective downtrend. Initial support is identified at 20,265, with the possibility of further correction towards a support trendline. The most substantial support lies at 19,000, implying a potential 14% decline from the peak, marking a major correction since 2020.

Analysing Nifty50 chart 

Weekly chart of Nifty 50 

Despite these technical signals, the Relative Strength Index (RSI) of Nifty indicates that the market is not in an overbought zone. Analysts suggest that this correction may be viewed as a healthy adjustment rather than a bearish scenario, given that the index is still trading above crucial moving averages, providing room for correction before entering a bearish phase.

Why market is falling? 

Examining the reasons behind this market correction, several contributing factors have been identified. Firstly, disappointing results from HDFC Bank, a heavyweight in the banking sector with a substantial weightage in benchmark indices, played a significant role in the market decline. The underperformance of HDFC Bank set a negative sentiment in the banking sector, further amplifying the overall market concerns.

Additionally, the downgrade of Reliance Industries’ stock by a prominent brokerage house contributed to the market’s unease. The downgrade affected investor confidence, reflecting the influence of individual stock movements on broader market sentiment.

The global perspective also played a role in the market correction. The delay in the expected fall of US 10-Year Government Securities (G-Sec) yields, initially anticipated for March, created disappointment among investors. This delay suggests that interest rates may remain on the higher side for an extended period, impacting market expectations.

Foreign Institutional Investors (FIIs) selling in January added to the selling pressure, with outflows amounting to Rs 13 to 14 crore. The market sentiment was further influenced by the introduction of SEBI ownership norms for FIIs, effective from February 1, 2024. Under these norms, FIIs with assets under management (AUM) over 50% or investments exceeding Rs 2,500 crores face additional regulations, potentially leading to adjustments in their investment strategies.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.