‘Gravestone Doji’ Warns of Profit Booking Amid a 100% Return!

  • Stock Market Analysis

The mood of the market has worsened as the week’s closing is nearing. The banking benchmark index Nifty Bank which opened the session with a gap up, is now trading 0.2% down to 43,510, by 1:44 PM IST.  Although 10 out of the 11 sectors are trading in the red zone on account of a good profit booking, PSU banks are leading the fall, after IT stocks.

PSU Banks have delivered a mind-boggling rally over the last few months, with the Nifty PSU Bank index itself delivering a 17.44% gain in the last one month alone. Without a question, these banks have become overbought, but that’s not a reason to question their ongoing bull run. But other signs are materializing on the chart which might call for a cautious stance from here on, for long holders. 

Daily chart of Nifty PSU Bank with volume bars at the bottom

Image Description: Daily chart of Nifty PSU Bank with volume bars at the bottom

Image Source: Investing.com

Firstly, talking about the sector, the formation of a Dark Cloud Cover candlestick pattern on the daily chart of the Nifty PSU Bank index is not a sign that the bulls might want to see. This pattern is a bearish reversal pattern that turns a prior bullish trend into a bearish one. The higher this pattern forms on the chart, the better its implications are. This is because the more overbought a stock becomes prior to this reversal signal, the better the impending fall could be.

In this case, the pattern is being formed around multi-year highs which is a worrying sign. To further give you the essence of how fast-paced the prior rally had been, the RSI (daily, 14) was showing a reading of 86.7 yesterday, which is not just above the benchmark overbought reading of 70, but also a 52-week high. 

Daily chart of Bank of Baroda with volume bars at the bottom

Image Description: Daily chart of Bank of Baroda with volume bars at the bottom

Image Source: Investing.com

As the entire sector seems set for a correction from here, one F&O stock that could probably give up a decent chunk of gains after a 104% one-year rally is Bank of Baroda Ltd (NS: BOB ). There has been a formation of a Gravestone Doji on the daily chart of this counter, by 2:00 PM IST, which is also a trend reversal sign. It is a form of Doji (wherein the opening and the closing of the day are almost the same) but there is a very long wick above this open and close price. A picture-perfect Gravestone Doji is formed with the open, close and low for the day being the same.

To give a glimpse of the psychology behind this pattern, the bulls start the session with a massive force as their confidence is sky-high which is being backed by the previous strong uptrend. But then, the bears pounce equally stronger, throwing the price back to square one, before the session’s close. This tussle creates a long wick as the price first moves significantly up and then falls back, and denotes that bears have started to gain the upper hand.

Some sort of weakness should be searched for in the next session to confirm the trend change. It could be a break of the previous day’s low, preferably with a negative closing or any other signal.   

 

PS - These patterns could change a bit by the closing but as the selling is going on, it will only likely to strengthen the bearish view.

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  • Kalyan Reddy @Kalyan Reddy
    Good analysis based on chart readings. Hope PSU bank index will take a breather after a stellar run so that fresh buying can commence at lower levels
    Like 0
  • shankar gowda s b @shankar gowda s b
    what about private banksapart from PSU Bank
    Like 0
  • rushab shah @rushab shah
    What do you think based on closing?
    Like 0
    • Aayush Khanna/Investing.com @Aayush Khanna/Investing.com
      Profit booking in the PSU banks is evident
      Like 0
    • rushab shah @rushab shah
      So where do you see for next week.. profit booking or another ride upside?
      Like 0
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  • namami ghosh @namami ghosh
    thank you for covering candle sticks.... will have to sit tight for now, given the change in market sentiment
    Like 2
    • namami ghosh @namami ghosh
      the arrows under the candle stick wicks make it easy to understand trendline support... enhances visual clarity
      Like 1
    • Aayush Khanna/Investing.com @Aayush Khanna/Investing.com
      Thanks for the feedback.
      Like 1
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  • shashi kantsingh @shashi kantsingh
    nice 👌
    Like 2
  • Dhiraj Batra @Dhiraj Batra
    bingo
    Like 2

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