In my previous post I had highlighted how Nifty had formed a bearish engulfing pattern right at the bottom of the trend channel which was active since March of last year. While posting that I had given examples how earlier an bearish engulfing pattern actually cauight the exact lows and we rallied from that point onwards. I am no fortune teller and whether the low of Nifty which was formed stays as is or is broken in the near term I am not 100% sure but we did rally more than a 1000 points from that point onwards.
In this post I would like to share that context is king and we should not be following textbook patterns. The reason being among others that a bearish engulfing pattern is bearish and can be bullish at times. No pattern in the world is 100% accurate and no one can be 100% accurate in the markets. The view of Technical Analysis is to form a guideline and create a method or a process which suits you and are willing to take losses as part of business expenses.
I would like to reason out here why context is king.
Why did a bearish engulfing pattern become a positive trigger for the Markets?
- Nifty had a massive fall in the earlier months making the retail traders convinced that markets were finally in a down trend after having bought the dips last year for a continuation of an uptrend.
- Newbie traders would be looking at the bearish engulfing weekly candlestick pattern right at the lows of the trend channel and would be convinced the markets were going down.
Please share your views as well.