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There’s no doubt that this week also saw investors fleeing from equities as broader market indices closed their 3rd week in the red zone. While going through the chart of some sectoral indices, caught my attention, all thanks to a very bearish signal that’s been made this week.
On the daily price chart, the index has formed a Head & Shoulders chart pattern which is one of the most popular trend-reversal signals. Its importance has further increased as it has formed at an all-time high level, where the probability of a reversal is high, on account of mean reversion.
Image Description: Daily chart of Nifty Bank (spot)
Image Source: Investing.com
Another conclusion that can be drawn is, this reversal signal has been generated on the sectoral index, meaning, the entire banking space is now prone to a noticeable correction.
Currently, HDFC Bank (NS:) is the highest-weighted stock in the index, with a weight of 42.38%, and looking at its individual chart, the selling pressure is quite evident. The stock closed 2.02% down for the week to INR 1,618.8 which is the lowest weekly closing after mid-June 2023. Slipping below the support of INR 1,640 is also quite a bad signal.
ICICI Bank (NS:), another heavyweight (23.03% weight) also fell 1.82% this week to INR 952.85, and its next support comes around INR 920, meaning another INR 30-odd fall can be witnessed shortly.
As both these banks make up two-thirds of Nifty Bank, with a combined weightage of 65.41%, these are enough to decide the trajectory of the banking index.
Coming back to Nifty Bank, the H&S formation is complete as the stock breached its neckline of 44,500. As the trend is clearly been establishing on the downside, the nearest target that is materializing on account of this reversal pattern is 42,630. As long as the index is not able to cross the high of the right shoulder, at 45,100, the trend should be deemed to be negative.
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