Index Outlook: Err on side of caution; keep off fresh long positions

Yoganand D BL Research Bureau | Updated on January 17, 2018 Published on August 15, 2016


The bellwether indices rebounded but closed on mixed note. They now test key hurdles

Taking positive global cues, the domestic equity market started last week on a positive note but later turned bearish as the Reserve Bank of India (RBI) kept the policy rate unchanged in its monetary policy review.

The RBI kept the repo rate unchanged at 6.5 per cent. However, positive global cues on improvement in crude oil prices helped the domestic bellwether indices bounce back. The global WTI crude oil surged 6.5 per cent to close at $44.4 a barrel last week. The recovery in the indices was also triggered by short-covering ahead of a long weekend and good corporate earnings reported by blue-chip companies.

Sentiment also turned upbeat as the India Meteorological Department (IMD) reported that the cumulative rainfall during this monsoon has been 3 per cent above the long period average (LPA). The foreign portfolio investors (FPIs) remained net buyers in the equity markets in the previous week as well.

Nifty 50 (8,672.1)

It was another volatile week for the Nifty 50. Though the short-term trend is up for the index it tests a key resistance at 8,700 leveland faces difficulty is surpassing this.

This week: Following a positive start, the index plunged to record an intra-week low last week at 8,540 and then rebounded smartly, climbing almost 1 per cent on Friday. However, the index closed the week on a negative note, down 11 points or 0.13 per cent, and has formed a hanging man candlestick pattern in the weekly chart which has bearish implications.

The indicators in the daily chart are on the brink of re-entering the bullish zone, but the weekly indicators continue to show weakness which is a cause for concern. Since moving above the key level of 8,500 in early July, the index has been on a sideways movement in the range between 8,500 and 8,700. As long as the index manages to hover above the key support at 8,500, the near-term view could be optimistic. Then, there is a possibility of breaching the key resistance at 8,700 and trending northwards to 8,800 in the coming week.

Hence, traders with a short-term perspective should tread with caution and go long above 8,700 with a stop-loss at 8,650. Having said that, failure to move beyond 8,700 and a decisive fall below the immediate support at 8,570 can prove to be a threat for the current positive view. Next key support at 8,500 can then come to play. But, a decisive plunge below 8,500 will lead to selling pressure and profit-taking which can drag the index down to 8,400 or 8,300 in the short term. In that case, traders should desist from taking fresh long positions.

Medium-term trend: The index has not made any drastic movement over the past two weeks. Another hanging man candlestick pattern coupled with the weakening indicators in the weekly chart is cause for concern.

A bearish start can pull the index below 8,600 and can test 8,500 levels. But, a slump below 8,300 will be a threat to the medium-term uptrend and drag the index down to 8,100 and 8,000 levels. Subsequent support is in the 7,700-7,800 band.

Conversely, strong rally beyond 8,700 can push the index upwards to 8,800 levels. Next key resistances are placed at 8,900 and 9,000. Investors with a medium-term horizon can stay invested with a stop-loss at 8,000.

Sensex (28,152.4)

Last week, the Sensex added 74 points higher and continues to test the crucial resistance at 28,000.

This week: Friday’s 1 per cent rally on the index has erased its initial loss. The index ended last week with marginally gains, forming a spinning top candlestick pattern which implies indecisiveness. The band between 28,000 and 28,500 is a significant resistance band from a medium-term view. An emphatic break through this resistance band can take the index northwards to 29,000 and 29,500 in the ensuing months. Nevertheless, a weak start in the truncated week can drag the index lower to the level of 27,500 and 27,000 in the near future. A downward break of 27,000 levels can ruin the short-term uptrend. Next support in the range of 26,400-26,500 can then come to play.

Bank Nifty (18,963.7)

The index advanced 37 points or 0.2 per cent in the previous week. However, the Bank Nifty persists in testing the key resistance at 19,000-mark. Over the past one month the index has been consolidating sideways in the band between 18,500 and 19,000. A conclusive breakout of this range will decide the next short-term trend for the index. Strong tumble below 18,500 can drag the index lower to 18,300 and 18,000 levels. Next important supports are at 17,830 and 17,600. But, a decisive upward breakthrough of 19,000 can strengthen the uptrend and accelerate the index to 19,500 and 20,000. Traders with a short-term perspective should tread with caution as long as the index trades in the aforementioned sideways band.

Global cues

In the prior week, the Dow Jones Industrial Average inched 0.2 per cent to close at 18,576.4. Both the short and medium-term trends are up for the index. It is volatile and continues to test a key resistance at 18,550. A decisive breach of this resistance can push the index higher to 18,622 and 18,700. Significant supports are placed at 18,300 and 18,000.

Published on August 15, 2016
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