Technical Analysis

Index Outlook | Are we there yet, Sensex, Nifty 50?

Lokeshwarri S K Yoganand D | Updated on March 21, 2020 Published on March 21, 2020

Indices ended on a positive note last week, but there are many hurdles ahead

It started as another hellish week for market participants, but the selling intensity tapered towards the end of the week. Both the Sensex and the Nifty 50, however, lost around 12 per cent last week. The US market witnessed one of its worst weeks since October 2008. The Dow Jones ended 17.3 per cent lower, while the Nasdaq Composite lost 12.6 per cent.

The CBOE VIX, the fear gauge, hit a high of 85.4 before closing at 66, one of its highest peaks since 2008.

We are entering derivative expiry week in the Indian markets and the sharp decline in March means that those with long positions could be in deep trouble. It is to be seen if the SEBI’s move causes a rebound as widely expected. But that is quite unlikely, though it may shrink volumes in stock derivatives, experiencing higher volatility.

Trading in cash market could also be hit over the coming month due to higher margins.

The limit of ₹500 crore given for trading in index futures and options would mean that most retail and HNIs can trade as usual without an underlying or collateral. Only those trading above this limit need to provide stocks while short-selling and cash while going long.

These curbs do not apply on existing index derivative positions that can be held until expiry or until they are finally squared. Also, for retail clients, the rules come into effect from March 27, after the expiry.

SEBI’s move is unlikely to materially impact the ongoing decline. Foreign portfolio investors have the option of shifting to the Singapore Stock Exchange to trade index as well as single stock futures there, thus indirectly influencing the price movement in onshore market.

 

We need to wait for the global markets to form a lasting bottom before hoping for a sustainable low in India.

Nifty50 (8,745.4)

The selling accelerated in the Nifty 50 last week, but Friday’s bounce lends some hope of consolidation and stability.

The week ahead: The Nifty 50 breached its previous low of 8,555 and on Thursday formed a new trough at 7,832. The rebound on Friday is heartening.

If the upmove continues in the early part of the week, short-term targets are 9,000 and 9,280. The key short-term trend-deciding level will, however, be in the 9,500-9,600 band. Bullish bets can be taken if the index manages to close above this level.

On the other hand, inability to move above 9,280 will mean that the downward pressure can continue in the short term.

Downward targets are then 8,800, 8500 and 7,832.

Medium term: The medium- as well as the long-term trend is down. The Nifty 50 breaching 8,555 and falling to the low of 7,832 has nullified the first scenario outlined last week. The index moved close to the first of our two downward targets given last week — 7,485 and 6,317.

If we extrapolate the movement last week, we get the next two downward targets at 7,764, 6,284. That brings us back to the conclusion that the area around 6,300 has a vital part to play if the downward move intensifies.

But the silver lining is that the index has already retraced 36 per cent from its latest peak, thus completing the requirement for a long-term correction. It has also retraced 46 per cent of the entire bull-phase from 2009 low. But a sustainable bottom can be confirmed only on a strong close above 10,500.

Sensex (29,915.9)

The Sensex slumped below 29,388 on Wednesday and registered a new 52-week low at 26,714.4 on Thursday. It staged a good recovery on Friday.

In the past week the Sensex has plummeted 4,187 points, or 12.2 per cent.

The daily relative strength index is displaying positive divergence, implying a possible short-term trend reversal. If the index extends the rally, it can test resistances at 31,000 and 31,600 in the ensuing week.

However, the short-term trend-deciding level is at 33,000.

Failure to move beyond 31,600 will keep the selling pressure intact and drag it down to 29,500, 28,000 and then to 26,714 levels.

A plunge below these supports can drag the index down to 26,000 and 25,400 in the medium term. Key resistances above 33,000 are at 34,000 and then 34,500 and 34,700 band.

Only a strong rally above 35,500 can confirm that it has formed a sustainable low.

Nifty Bank (20,317.6)

The Nifty Bank index nosedived 4,848 points, or 19.3 per cent, emphatically breaching the key long-term supports at 24,000 and 22,000.

But after recording a new 52-week low at 18,675.6 on Thursday, the index marginally gained 1 per cent on Friday. The index currently tests a psychological support at 20,000. The daily relative strength index is in the oversold territory, indicating potential trend-reversal.

An immediate resistance is at 21,000. A breach of this hurdle can push the index higher to 22,000 and then to 22,500 levels.

A further rally can extend the corrective up-move to 23,500 and 24,000.

Traders with a short-term perspective should continue to tread with caution and consider initiating long positions on a strong rally above 21,000 with a fixed stop-loss.

A fall below 20,000 can pull the index down to 19,500 and to 18,675 levels again. A further decline below these levels can test supports at 18,500 and 18,000 in the short term.

Global cues

In the previous week, the Dow Jones Industrial Average Index nosedived 4,011 points or 17.3 per cent. The fall has decisively breached key long-term supports at 22,500 and 20,000.

The index hovers above a key support level of 18,900. A plunge below this can drag it down to 18,650 and 18,500 levels. Subsequent supports are at 18,300 and 18,000.

Resistances are at 20,000 and 21,200. A strong rally above these levels can take the index higher to 21,770 and 22,200 levels.

Published on March 21, 2020
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