Index Outlook . Index Outlook: A corrective up-move is possible

The sharp fall in the US indices rattled investors across the globe, last week. While the developed markets plunged more than 5 per cent, the emerging markets were broadly resilient. The Nifty and Sensex tumbled between 2.8 per cent and 3 per cent. In the coming truncated week — the market closed on Tuesday for Mahashivratri — domestic investors need to focus on the macro data such as IIP data for the December month and CPI inflation numbers for January, which will be released on Monday. Also, Japan GDP’s and eurozone GDP data, could provide some global cues for the market.

Nifty 50 (10,454.9)

The Nifty 50 index was extremely volatile last week. The index tumbled 4.5 per cent for the week and recorded an intra-week low of 10,276 on Thursday. However, subsequent bounce back capped the weekly loss at 2.8 per cent. Even though the index witnessed selling pressure at higher levels, buying interest is noticeable at lower levels.

Short-term trend: Altering the short-term uptrend, the index declined last week, breaching the key supports at 10,750 and 10,500. However, the index found support at around 10,300 and reversed higher. It now tests the significant medium-term support in the band between 10,450 and 10,500.

The daily relative strength displays positive divergence, indicating the possibility of a near-term trend reversal. The progressing downtrend from the all-time high of 11,171.9 recorded on January 29 appears to have found a temporary base at around 10,300 last week.

A strong rally above the immediate resistance level of 10,600 will strengthen the near-term trend reversal and take the index higher to 10,700 and then to 10,736 levels. On a further rally above these levels, the index can encounter resistance at 10,850, which is a vital trend-deciding level to note. Only a breakthrough of this resistance will alter the short-term downtrend and push the index upwards to the 11,000-mark, which is key psychological level. Next resistances are placed at 11,100 and 11,200.

Conversely, inability to move beyond 10,600 will keep the index moving sideways in the 10,275-10,600 band for a while, as the volatility settles down. An emphatic slump below 10,300 can drag the index down to 10,200 and 10,000 levels in the short term. Investors/traders should tread with caution. Initiate fresh long positions on a strong rally above 10,600 levels with a fixed stop-loss. Investors with low-risk appetite can remain on the sidelines for some more time.

Medium-term trend: The recent sharp fall, after the formation of a bearish engulfing candlestick pattern, confirms trend reversal in the weekly chart. The negative divergence in the weekly moving average convergence divergence backs this trend reversal. Nevertheless, the index now tests a key medium-term support in the 10,450-10,500 range, which can provide a temporary cushion for the index. Resumption of the uptrend from this base zone can take the index higher to 11,000 in the medium term. Further rally beyond this can take the index northwards to 11,500 with some break at 11,300. On the downside, plunge below the current support level of 10,450 can pull the index down 10,000 which will deteriorate the medium term uptrend. Next support is at 9,700.

Investors should note and tread with caution in the coming weeks as there is conflict between short-term and medium-term trends. Until a few weeks back, both the trends were up. But after the recent sharp fall, they have altered. Now, there are positive signs of short-term trend reversal while the medium-term trend could be under threat. Therefore, next few weeks’ price action is crucial to determine these trends.

Nifty Bank (25,463.6)

Last week, the Bank Nifty nose-dived 987 points or 3.7 per cent. On Thursday, the index took support at around 25,000 and bounced back. But an immediate resistance at 26,100 capped the corrective rally and the index resumed the down-move. The index now tests a vital support at 25,500. With increase in volatility, the daily Bollinger Bands have expanded. The index now hovers at the lower end of this band, implying near-term corrective rally on the cards.

An upward reversal from current support band of 25,500 can take the index higher to 26,000-26,100 range in the near term. Further rally beyond this range can take the index northwards to 26,500. Next resistances are at 26,750 and 27,000. But a strong plunge below the current base can pull the index down to 25,000, which can provide a base once again. Subsequent supports are at 24,800 and 24,500. Traders with a near-term view can go long on a rally above 25,750 with a stop-loss at 25,500.

Sensex (34,005.7)

The Sensex nose-dived 1,060 points or 3 per cent in the prior week. However, the index tests a key support in the 33,800 and 34,000 band. An upward reversal from this zone can take the index higher to 34,400 and 34,600 levels. Further rally above 34,600 can encounter resistance at 34,800 and 35,000. Alternatively, significant supports below 33,800 can pull the index down to 33,600 and 33,400. Next vital medium-term support is pegged at 33,000.

Global cues

The Dow Jones Industrial Average plummeted 1,330 points or 5.2 per cent to close at 24,190.9 last week. However, the daily relative strength index shows signs of positive divergence, which can trigger a near-term corrective up-move. Immediate supports are at 24,000 and 23,500. Resistances are placed at 24,500 and 25,000 levels. A strong rally above 25,000 is required to bring back bullish momentum and take the index higher to 25,280 and 25,500 levels.

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