Technical Analysis

Index Outlook: Major trend bullish despite high volatility

Akhil Nallamuthu BL Research Bureau | Updated on September 05, 2020 Published on September 05, 2020

If Nifty 50 regains the upward momentum and aligns with the overall bull trend, it can rally up to 11,580 and 11,630

The border tensions between India and China played out against the domestic equity market last week as the benchmark indices, i.e. the Nifty 50 and the Sensex, witnessed a sharp sell-off during the very first hour of trading on Monday. Interestingly, the indices opened with a gap-up before being sold-off. What followed was a minor gain but all of that was erased on Friday as the market tumbled.

Volatility, as measured by India VIX — the volatility index — shot up by nearly 25 per cent last week to 22.84. Higher volatility means unease in the market and if both the indices tumble below their respective support levels, around which they closed last Friday, a deeper correction cannot be ruled out even though the major trend remains bullish.

Nifty 50 (11,333.8)

The Nifty 50 slumped by 2.7 per cent as it declined by 313 points last week, after gaining by about 2.5 per cent during the preceding week. While the major trend remains bullish, the index undergoing some more correction is a possibility.

Week ahead: Twice in the past five trading sessions, the bears’ attempt to stretch the decline was spoiled by 11,300, which stood firm as a support level. During the upcoming sessions, if the index slips below this level, the correction can be extended towards the support at 11,100, where the 50-day moving average (DMA) lies.

But such a decline cannot be counted as a bearish trend reversal because, at 11,100, the pull-back would not have even covered 23.6 per cent Fibonacci retracement of the bull run since March, which lies at 10,800

Going ahead, if the index regains the upward momentum and aligns with the overall bull trend, it can appreciate to 11,580 and 11,630. Above 11,630 the index can be expected to test the recent high of 11,794.

In essence, even though we need to be prepared for a deeper correction if the bears take out the support at 11,300, the short-term trend is positive as long as the index remains above 10,800 and the corrections can be considered as opportunity for fresh longs.

Medium term: The medium-term trend does not look to be under trouble yet since the index is above the 50-DMA and has not formed a lower low in the daily chart. The index has witnessed a couple of considerable pull-backs while it rallied from its low of 7,511 since March.

As per the Fibonacci retracement measurement, the index registered a correction of 38.2 per cent and 23.6 per cent in May and June, respectively, before resuming the move upwards. Taking a similar measurement, the 38.2 per cent Fibonacci retracement level is at 10,200 - a strong base.

Substantiating the positive inclination, the Relative Strength Index (RSI) in the weekly chart is in the bullish zone and the Moving Average Convergence Divergence (MACD) in the weekly chart continues to rise with the index. Hence, the medium-term trend cannot be considered bearish till the index stays above 10,000. And a resumption in bull run can take the index to 12,000 and might even re-test the lifetime high of 12,430.




Sensex (38,357.1)

The Sensex depreciated by 1,110 points i.e. it lost 2.8 per cent last week, effectively erasing the gains it made during the preceding week. After getting off on the right foot, it immediately hit the psychological level of 40,000. But the up-move ended right there, and the index headed lower for the entire week with intermittent corrective rallies.

The price level of 38,300 provided some sort of relief as it restricted the downfall below it. The nearest support below that level is at 37,700 where the 50-DMA lies. Subsequently, the price area between 36,600 and 37,000 can act as a cushion. From the near-term perspective, unless the index falls below 36,600, the likelihood of bulls recovering is high.

Considering the medium-term perspective, last week’s correction could be a minor decline and the index could start appreciating towards 39,250 and 40,000. A breakout of 40,000 can possibly lift the index to the lifetime high of 42,273. On the downside, 34,600 holds the key.

Nifty Bank (23,011.5)

The Nifty bank index, which outperformed both the benchmark indices during the final week of August, underperformed last week as it dropped by 1,512 points i.e. a decline of 6.2 per cent.

If the index slumps below 23,000, it can find support at 22,300. A breach of this level can drag the index lower to 21,000. Considering that the trend is bullish biased and 21,000 is a strong support, the index is likely to bounce even if it extends the correction during the upcoming sessions.

In the event of the index regaining positive momentum, it can potentially surge to 24,000 and 25,000 in the near term. If the bulls can retain the momentum above 25,000, it can even appreciate to 27,000 and 30,000 over the medium term.

However, if the strong base of 21,000 is taken out and the index heads southwards, it has a support band between 19,500 and 20,000. Subsequent support can be spotted at 18,500.

Global cues

The Dow Jones Industrial average, which appreciated in the first half of last week, fell sharply in the latter half after registering an intra-week high of 29,200. It closed at 28,133 on Friday, against previous week’s close of 28,653, losing 1.8 per cent for the week. Nevertheless, the index remains above the important support of 28,000 and 21-DMA, keeping the short-term outlook positive.

Resumption in the up-trend is likely to take the index higher to 28,700 and 29,200 in the short term. Above 29,200 it might retest the lifetime high of 29,568. On the downside, the key support levels below 28,000 are at 27,400 and 26,600.

Notably, a break below 26,600 can turn the near-term outlook negative.

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Published on September 05, 2020
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