Technical Analysis

Poised at significant support

LOKESHWARRI S.K. | Updated on November 09, 2017

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Sensex (19,007.5)

Market participants mired in gloomy thoughts on inflation and the RBI's next policy rate move were pleasantly diverted by strong earnings reported by some front-line companies. This also provided the bulls with the ammunition to defend the 19,000 bastion. The ongoing struggle for supremacy between the bulls and bears is clearly reflected in the manner in which Sensex was unable to move in either direction last week and closed almost flat.

Next week promises to be a thrilling one with monetary policy meeting and derivative expiry scheduled mid-week. Continuing flow of earnings announcements will also give investors plenty to react to.

Volumes were lacklustre in cash, but derivative volumes perked up. Open interest this time is not unduly high around Rs 1,50,000 crore. This implies that the expiry could be relatively smooth this month. Interestingly, index put call ratio has declined below 1. In the Indian context, this implies an oversold market.

Oscillators in the weekly chart have moved in to the negative zone. But they are pausing slightly below the neutral zone implying that things have not deteriorated beyond redemption. Monthly oscillators are still in bullish zone though they are dipping slightly. The tiny star in the weekly candlestick chart also denotes that there is a fair chance of the current down-trend losing momentum at these levels.

The medium term trajectory of the Sensex is unfolding in line with our expectation, as explained in this column, a fortnight ago. Third leg of a flat formation from 21,108 has the targets at 19,334, 18,512 and 17,689. We adhere to the view that the area around 19,000 is a strong psychological support and those holding short positions should stay wary as long as the index does not record a strong close below this level.

The Sensex is currently halting after recording the low of 18,780. It is possible that the third leg of the flat ended at this trough and we can get a bounce back as the next leg of this consolidation between 19,000 and 21,000 unfolds. This can be an X followed by another 3 or 5 wave pattern. Rally above 20,200 is needed to signal the possibility of the index etching a new high.

However, the recovery last week was not strong enough to mitigate the bearish short-term trend. Failure on part of the Sensex to move above 19,300 will mean that the index is readying for a dive to 18,500 or below before stability returns.

The upcoming week could see some wild intra-day swings in the index as the January derivative series rolls in to expiry. Weak start would make the index decline to 18,800, 18,679 or 18,547. Traders would be keeping a very tight watch on the second support where the 200-day moving average is positioned. Close below this level will dent the morale of market participants greatly. Short term resistances would be at 19,270, 19,574 and 19,816.

Nifty (5,696.5) recorded the low of 5,624 last week and is currently consolidating around 5,700. Targets for the third leg down from the 6,338 peak stay at 5,801, 5,567 and 5,332. Since the index has already moved below the first target, the medium-term down-move can end anytime now. Recovery from these levels will keep the medium-term prospects very bright with the possibility of the index breaking out to a new peak. But decline to 5,567 or below will mean that the index would struggle to move above its current life-time high in this calendar.

The near-term trend in the index is down since the recovery last week was not convincing enough. Near term resistances for the index are 5,778 and 5,824. Failure to move above the first resistance will be the cue for short-term traders to initiate fresh short positions with stop at 5,830. The index can decline to 5,600, 5,531 or 5,497. Presence of the 200-day moving average at 5,615 makes the band between 5,580 and 5,620 a very significant support zone from where a rebound is possible. Fresh longs, should, however be avoided on a close below this support band,

Global Cues

Global equity investors were focussed on quarterly earnings last week, relegating European sovereign debt concerns, inflation and so on to the background. DJ Euro STOXX 50 index closed almost 2 per cent higher.

CRB Index that tracks the movement in the commodity basket, has moved past the July 2008 peak on runaway rallies in agri-commodities such as cocoa, corn, cotton, wheat and so on. Crude is hovering around $90 and seems poised to break out to $100 soon.

The Dow is slowly carving a path higher, this is the eighth positive weekly close for this index.

Medium term targets for the index are 12,444 and 12,896. The positive medium-term view will be roiled only on a close below 11,260. Interestingly, two of the important European benchmarks, DAX and FTSE are also in a long-term uptrend now and appear to be heading towards their 2008 peaks.

Published on January 22, 2011

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