Technical Analysis

Index Outlook | A fresh lifetime high in sight for Sensex, Nifty 50

Akhil Nallamuthu | Updated on August 29, 2020 scyther5

The benchmark indices broke out of the consolidation range, set to advance further

The Nifty 50 and the Sensex have been rallying strongly since the last week of March, supported by ample liquidity in the system.

The market does not seem worried about the disconnect between the financial market and the actual state of the economy as it continues with its impressive run.

While the indices had been in a consolidation phase for over a month, the bulls seem to have regained momentum, resulting in a fresh breakout last week.

This will mostly likely invite more buyers, resulting in further appreciation. As the market rallied, India VIX — the volatility index, aka, the fear gauge — dipped nearly 8 per cent last week to 18.35, a conducive environment for the bulls.


Nifty 50 (11,647.6)

The Nifty 50 gained by about 2.5 per cent last week as it went up by nearly 280 points. Consequently, it has invalidated the key resistance levels of 11,500 and 11,600, opening the door for further strengthening.

Week ahead: The index, which had been oscillating between 10,900 and 11,400 over the past five weeks, breached the upper boundary of the range last Monday. Following this, it rose and registered an intra-week high of 11,686 before ending at 11,647.6 on Friday.

The bulls look to have regained momentum and so the index can be expected to extend the rally in the upcoming week.

The daily relative strength index (RSI) is showing a fresh uptick following the breakout, and the moving average convergence divergence (MACD) indicator in the daily chart, which was gradually declining, has now turned its trajectory upwards.

These are supportive indications of the positive trend, and in the near-term, the index can rise towards the resistance levels at 11,770 and 11,860 on the upside.

Above 11,860, the likelihood of the index testing the psychological level of 12,000 will be high.

But if the index starts descending, the important supports from the current levels can be spotted at 11,500 and 11,400.

Though the uptrend will stay intact until it stays above 11,400, a break below this level has the potential to turn the outlook negative. The subsequent support levels are at 11,340 and 11,250.

Medium term: The medium-term uptrend looks as strong as the short-term uptrend.

Over the past few months, as and when the index witnessed a correction, it has been bouncing off the 21-day moving average (DMA) and making higher highs and higher lows, indicating considerable upward momentum.

Not only that, the MACD indicator in the weekly chart has just also entered the bullish zone; the RSI continues to maintain a positive slope and remains in the positive territory.

Given the circumstances, the likelihood of the Nifty 50 reaching the lifetime high of 12,430 might not be a difficult task and a solid break above that level can even lift the price to 13,000.

In case the index is unable to hold on to the gains and begins to drop, the nearest support levels are at 10,900, 10,680 and 10,500.

But importantly, from the medium-term trend perspective, the critical level of 10,000 holds the key — a bearish reversal cannot be confirmed until the index trades above that level. The subsequent support levels are at 9,700 and 9,400.

Sensex (39,467.3)

The Sensex appreciated last week by 2.7 per cent by rallying about 1,030 points, marginally outperforming the Nifty 50’s gain of 2.4 per cent. The index, which had been fluctuating between 37,000 and 38,600 for five weeks in a row, broke out of the range last week — a renewed bullish indication.

With positive momentum acting in its favour, the index can be expected to cross over the resistance of 40,000 with ease and move towards 41,000 in the near term. However, if the uptrend loses steam and the index declines, the immediate support levels can be 38,600 and 37,000.

A deeper move southward can drag the index to 36,000 and 35,000.

Over the medium term, the price action hints that the index is likely to extend the rally and possibly test the all-time high of 42,273. A breakout of that level can improve the bullish momentum, where it could climb towards 43,000. The medium-term trend can be bullish as long as the index holds above 34,000.

Nifty Bank (24,523.8)

The Nifty Bank index surged by about 2,200 points last week, posting a considerable gain of 10 per cent. Thus, it outperformed both the benchmark indices by a big margin.

For nearly two months, the index had been charting a sideways trend, moving between 21,000 and 23,200. Now that it has broken out of the range, the outlook has turned positive — the index could rally to 25,800 and 27,000 in the near term.

If the bullish momentum sustains above 27,000, the index can be pushed up to 28,500 and 30,500 over the medium term.

Considering a scenario where the index weakens and slips below the support of 23,200, it will most likely retest the support at 21,000. But a break below 21,000 can intensify the fall where the bears could pull the index towards the support band between 19,500 and 20,000 — an important psychological level.

In an event where this price band is breached, the index could decline to 18,500.

Global cues

The Dow Jones Industrial average ascended last week and wrapped up at 28,653 versus the preceding week’s close of 27,930.

Therefore, it has rallied above the resistance at 28,000 which can now be a support for the index. Since the bull trend looks to be under no threat, the index will most probably breeze past the hurdle at 29,000 and test the lifetime high of 29,568 in the near term.

On the downside, the support levels below 28,000 can be seen at 27,400 and 26,600. Until the index treads above 26,600, the short-term price swing will remain inclined to uptrend.

Published on August 29, 2020

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