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Index Snapshot: Sensex poised at key support zone

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Global benchmarks plummeted as Greece's fiscal crisis showed no signs of abating and instead threatened to snowball across the other European regions. This debt concern also stimulated an electronic glitch-driven rout in US stocks on Thursday easing the US market of a whopping $1 trillion as Dow plunged 996 points or 9.2 per cent intra-day.

Asian stocks, Nikkei and the Shanghai Composite also fell in line with the European and US indices. Indian benchmarks Sensex and Nifty followed global peers by slumping 4.5 per cent and 4.9 per cent respectively last week.

Sensex (16,769.1)

Since the April 7 peak of 18,048, the Sensex has been on a gradual short-term decline. Taking support at 17,400 levels, the index bounced upward twice in April. However, the up move failed to cross the17,800-level resulting in the formation of a descending triangle pattern. As the pattern is formed at the end of an uptrend in this instance, it is considered to be a reversal pattern. However, the implication of a strong reversal would be minimal as the pattern size is small compared with the uptrend started from March 2009.

On May 4, the benchmark fell 1.4 per cent with good volumes decisively penetrating the triangle pattern and its 50-day moving average. It is trading well below its 21- and 50-day moving averages.

In the same week, the Sensex achieved its descending triangle pattern price objective of 16,800 and is heading towards the significant medium-term support zone between 16,500 and 16,580. Moreover, 200-day simple moving average is positioned at 16,647, which will be the immediate support level to observe.

The daily relative strength index (RSI) has entered a bearish zone, below 40-level and the weekly indicator too has started falling in the neutral region implying that the uptrend is losing momentum whereas the downtrend is gaining strength. Daily moving average convergence and divergence indicator is on the brink of entering into negative territory from positive territory.

A strong decline below 16,500 levels would signal that the Sensex is in a medium-term downtrend which can take the index to 16,000 or back to February 2010 low of 15,650 levels.

Resistances for the near-term are at 17,000 a key psychological level and 17,400. A reversal from the near-term supports can take the Sensex higher to the immediate resistance level of 17,000 or a near-term sideways movement in the band of 16,500 and 17,100, before rallying higher.

Nifty (5018.05)

The Nifty moved lower right from the beginning of last week and closed negative in all five trading sessions. A similar descending triangle pattern is noticed in the Nifty with horizontal line at 5,200. It determinedly breached this pattern on May 4 and achieved its price objective of 5,000. Moreover, Nifty slipped below key short-term support band of 5,100 and 5,120, strengthening its short-term downtrend that has been in place from early April peak of 5,400.

The important near-term support for the Nifty is in the band between 4,930 and 4,960 where the 200-day moving average coincides with the support. Rebound from this zone can take the Nifty up to 5,125 or 5,200. Subsequent resistance is at 5,350. However, a fall below 4,930 would drag the index further down to 4,850 or 4,720 in the upcoming weeks. Only a strong close above 5,200 levels would mitigate the short-term downtrend. Swing traders can hold their short positions as long as the index trades below 5,125. The medium-term trend for the index has been sideways since October 2009 between 4,500 and 5,400.

S&P CNX 500 (4,182.2)

After hitting long-term resistance in the range of 4,500 and 4,525 in mid January, the index started to move sideways in the broad range between 4,050 and 4,500. The short-term trend is down from the April 7 peak. On Friday, it decisively closed below the immediate support around 4,250 by declining 1.75 per cent. The index is hovering just above the medium-term support of 4,140. Strong close below this level would pull the index down to the lower boundary of 4,050 in the short-term. The resistances for the week are at 4,250 and 4,310.

US Dow and S&P 500 were very volatile last week, swinging as much as 10 per cent in some sessions. The CBOE volatility index was extremely volatile during the last two days of the week, recording a high of 42.15 and ending at 40.9.

This index jumped 86 per cent over the week, signalling that investor panic was exceptionally high. With this, the daily relative strength index has reached the overbought territory implying it can correct in the near-term.

The US Dollar index ended the week at 84.65, gaining 3.3 per cent. Among the European markets CAC was the worst performer last week tumbling 11 per cent, while DAX and FTSE were down 6.8 and 7.7 per cent respectively. Japan's Nikkei also dived 6 per cent. Sri Lanka's All Share Index on the contrary, continued to outperform by advancing 0.8 per cent.

In commodities, gold climbed 2.5 per cent to settle at $1207.8 an ounce and light crude oil plunged almost 13 per cent, ending at $75.1 a barrel.

— Yoganand D.

(This article was published in the Business Line print edition dated May 9, 2010)
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