Technical Analysis

Index Outlook: Corrective rally may be short-lived

Yoganand D | Updated on August 05, 2019

Having fallen four weeks in a row, the indices need to break key hurdles to alter the downtrend

The Sensex and the Nifty began the week on a muted note, owing to weak sentiment in the domestic market. The indices slumped further, taking cues from global markets, which reacted sharply after the Fed action last week. As expected, the Federal Reserve reduced rate by 25 basis points. But the Fed Chairman’s comment, indicating that there may not be further rate cuts, displeased markets.

Trump's new tariff threat dragged markets further; the Dow Jones was down by 2 per cent for the week.

In the ensuing week, the investors should tread with caution. All eyes are on the RBI’s upcoming monetary policy meeting.

Nifty 50 (10,997.3)

Last week, the Nifty index continued to trend down, breaching a key support as well as the 200-day moving average at around 11,200. After marking an intra-week low at 10,848, it recovered marginally and tests a key support at 11,000. For the week, the index has tumbled 286 points or 2.5 per cent. In July, it had plummeted 670 points or 5.7 per cent.

Following a continued decline over the past four weeks, a near-term corrective rally cannot be ruled out at this juncture. It has reached the lower boundary of the Bollinger Bands and the relative strength index has entered the oversold territory, indicating possibility of a corrective up-move in the near term.

An upward reversal from the current key base level of 11,000 can take the index up to 11,200 initially. A decisive rally above this barrier can lift it up to 11,400 and 11,500 in the ensuing weeks. Inability to move beyond 11,400 or 11,500 can keep the short-term downtrend that started from the June high of 12,103 intact.

In such a scenario, the index can once again test support at 11,000. Conversely, if it decisively breaks below the key psychological support level of 11,000, it can move down to 10,800 and 10,600 over the short to medium term. Such a fall will alter the medium-term uptrend and pull the index lower to the subsequent supports at 10,400 and 10,100 levels. We reiterate that investors with a medium-term perspective can stay on the side-lines and re-enter at lower levels.

However, strong breaks above 11,500 can alter the downtrend and take the index up to 11,700 and 11,800. A further rally above 11,800 is needed to reinforce the bullish momentum and take the Nifty higher to 12,000 over the medium term.

Medium-term trend: After the conclusive break below the key base level of 11,500 and 11,200 recently, the medium-term uptrend is under threat. An emphatic break below 11,000 will change the medium-term uptrend and drag the index lower to the next key medium-term support level of 10,800 and 10,600. On the other hand, a strong rally above 11,500 is required to strengthen the up-move and take the index higher to 11,800 levels. Next resistance is at 12,000.




Sensex (37,118.2)

The Sensex had slumped 764 points or 2 per cent last week, extending the short-term downtrend. It has decisively breached a key support at 38,000 recently and now tests the next key base at 37,000. The 200-day moving average is also poised at current levels. A strong rally above 37,600 can take the index higher to 38,000 in the near term. But to alter the short-term downtrend that has been in place from the June high of 40,312, the index needs to strongly move above 38,600 levels.

Such a rally can push the index higher to 39,000 and 39,400 levels in the short to medium term. Having said that, failure to move beyond 38,000 will keep the downtrend in place. A slump below 37,000 can drag the index lower to 36,400 and 36,000.Subsequent supports are at 35,500 and 35,000 levels.

Nifty Bank (28,204.9)

The Nifty Bank index nose-dived 1,120 points or 3.8 per cent last week, underperforming the bellwether indices. But the index now tests a key support at 28,000 and its 200-day moving average at around 28,300. With the daily indicators and oscillators featuring in the oversold territory and the index hitting the lower boundary of the Bollinger Bands, a near-term corrective rally is on the cards. A strong rally above 28,500 can take the index up to 29,000. A further break above this level can push the index higher to 29,500 and 30,000 in the short to medium term.

To alter the short-term downtrend, the index needs to decisively break above the 30,000-mark. Next resistances are at 30,500 and 31,000 levels. Inability to move beyond 30,000 will keep the selling pressure intact and drag the index lower to 28,000 once again. A conclusive fall below 28,000 can extend the downtrend to 27,500 and 27,000 levels in the short to medium-term horizon. Traders with a contrarian view can go long on a strong rally above 28,500 levels with a fixed stop-loss.

Global cues

Last week, the Dow Jones Industrial Average had plunged 707 points or 2.6 per cent to close at 26,485. While trending down, the index breached a key support at 26,700, which could act as a vital resistance now. A strong rally above this barrier can take the index up to 26,900 and 27,000 levels. Nevertheless, an emphatic breakthrough of the immediate support at 26,300 can drag the index down to 26,000. Subsequent supports at 25,700 and 25,500.

Published on August 03, 2019

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