Interpreting the Nifty Candle

The big reaction we saw on Friday in the markets has provided us some interesting candlestick formations on multiple time frames. Since such convergence is rare, I felt that this could be a good way of explaining the importance and the interpretation of such candlestick patterns.

Candlestick patterns first came to the limelight when Steve Nison wrote the book, Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East in 1991. Candlestick charts are now the main stay of most Technical Analysts due to the simplicity with which one can interpret what has gone through the day without even having to look at the prices.

Just like most other things, a candlestick pattern provides one with a probability of what did happen as the bar was getting created and what can happen based on the reading of that bar.

Friday’s big fall in Nifty has meant that we got some interesting pattern formation for the day (Friday), for the week and for the month (since that day was also the last day of the month).

First, lets look at the day Candle

Day

The Red bar is the candlestick for the price action we saw on Friday. The bar being red in color indicates that the markets opened at the higher level and closed at the lower level. But what interests us is not just that but the fact that this bar was able to engulf the previous bars. The pattern thus is known as Bearish Engulfing pattern.

This pattern has the highest weight when it comes on top of a bull rally and that is what we have seen happen. A simple reading of the bar is that markets opened normally and went up higher on buying, but the buying was not sustained and selling reversed the course of the action. But since markets are at a new high, the selling should have got absorbed and the lack of absorption is suggestive of the fact that everyone who wanted to buy has already bought and there is none left to buy and hence hold up the prices.

Since most candlestick patterns require a confirmation signal, what we shall be looking for on Monday would be a break of the Friday’s low.

Now, lets move to the Weekly Candle

Week

The above pattern is called “Gravestone Doji” and once again, the candlestick pattern has formed at a place with very high significance. The pattern is pretty suggestive of the fact that bulls have not been able to force their hand and the bears after being banged up pretty bad seem to be getting their mojo back.

The high of the weekly bar is now crucial. As long as that is not broken, bears can hope to see some reversal in the offing.

And finally the Monthly

Mon

The Monthly file is a reverse of the daily. While on the daily time frame we saw a Bearish Engulfing pattern, on Monthly we are seeing a Bullish Engulfing pattern. But then again, the way to interpret candlestick patterns is based on where they are placed and in that sense, this pattern is not something that adds value.

To conclude, both the daily and the weekly candle seems to be suggestive of a top in the offing. The current high hence becomes the key area. If that is broken and markets closes above that, both the patterns can be treated as invalid and we may see a continuation.

February has generally been a bullish month while January was usually a bearish month. Will we see a reversal in that pattern? What about the Budget Rally? On Feb 3, we have the RBI policy as well, how will that pan out for the markets? Lots of questions with no real answers unless on is a Astrologer 🙂

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About Prashanth

Have been a full time participant in the stock markets since 1996. Run a Yahoo Group where focus is exclusively on discussions of the Indian Markets using Technical Analysis as the tool (groups.yahoo.com/group/technical-investor)
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