Technical Analysis

Guideposts for a volatile market

Lokeshwarri S K | Updated on April 07, 2018 Published on April 07, 2018

The short-term reversal is approaching a key hurdle. Investors need to stay watchful

The Indian equity market turned choppy in the first quarter of 2018, with stocks first hitting record highs in January only to crash in February and March. Other global investors are also in the same boat, with equity markets across the globe entering turbulent waters, after sailing under sunny skies through most of 2017. Most global indices, including the Sensex and the Nifty, are down 10 to 15 per cent from their recent peaks.

While the bout of correction in February was caused by concerns on tighter liquidity and rising bond yields, it is the POTUS who is behind the ongoing churn. After increasing import tariffs on metals on all countries, he has begun targeting China, specifically, to slap higher duties, ostensibly to bring down the large trade deficit that the US runs with its Chinese counterparts. China has retaliated tooth and nail.

Investors are hoping that the trade war could soon fizzle out, given the limited attention span of Donald Trump and that he would start thinking about building the wall on the Mexican border, instead. If that happens, the equity market may rebound and we could have a sanguine range-bound market in 2018. However, if Trump starts enjoying the excitement caused by the trade war and decides to persist, it could prove calamitous for the global economy as well as the stock market.

Technical charts of all global indices are quite precariously placed, at the lower end of the decline, reflecting the uncertainty. It would be best to wait for the end of this skirmish before getting gung-ho. A more detailed guidance on levels to watch are given below.

Nifty (10,331.6)





The Nifty recorded a low at 9,951 on March 23 and a short-term rally is in progress since then.

Short term trend: The reversal from the zone around 10,000 is good from a short-term perspective. But rather than a run-away rally, range-bound trading between 9,900 and 10,400 appears most likely over the next few months.

Here are some guideposts to help you trade the next few weeks.

a) The current rally can extend up to 10,439. There is a strong resistance in the zone between 10,400 and 10,450 that can thwart uptrends.

b) Reversal from the 10,400-10,450 zone will result in the index trading sideways in the zone between 9,900 and 10,450 for a month or two.

c) Fresh trading longs are recommended only on a close above 10,450. Next targets are 10,560 and 10,700.

d) Firm close above 10,700 is required to signal that the short-term trend has reversed higher.

e) Break below 9,950 will mean that the Nifty is heading towards 9,700 or 9,200.

Medium term trend: It is fairly clear now that the medium-term trend has reversed lower from the 11,171-peak. Inability of the Nifty to move beyond 10,500 over the next few weeks will confirm this assumption. This will open the door for a fall towards the next medium-term targets of 9,560 and 9,170. We stay with the view that the medium-term trend will deteriorate only on a strong decline below 9,170.

If the rally gathers pace, the area around 10,700 will act as a strong resistance. This needs to be crossed to set up the next move to 11,171. A sideways move between 10,000 and 11,170 could then follow for the rest of the year.

A lot however hinges on the movement in global markets. Ongoing weakness in all the global indices suggests that the market is likely to remain volatile for a few more months.

Sensex (33,626.97)

Sensex formed a bottom at 32,483.8 in March and is rallying higher since then.

Short term trend: The index can rally towards 34,000 in the coming week but investors should watch out for reversal from that level that can drag the Sensex lower to 33,000 or 32,500 over the short term.

On the other hand, a break above 34,000 can take the index higher to 34,500 or 35,000.

Medium term trend; One leg of the downward move from 36,443 has been completed at 32,483. If the ongoing corrective rally struggles to move beyond 34,000, it will mean that weakness will continue and the index can decline to 31,552 or 30,000.

On the other hand, a strong close above 35,000 is needed to signal that the medium-term trend has become sideways. The most likely range for rest of the year will then be between 36,500 and 32,500.

Bank Nifty (24,873.1)

The Bank Nifty is in a medium-term down trend since the 27,652 high recorded on January 29. While a short-term rally is in progress since the low of 23,605 recorded in March, traders need to stay watchful till the index records a firm close above 25,188. A reversal from 25,188 can drag the index lower towards 24,087 or 23,605.

Next targets on a close above 25,188 are 25,647 and 26,106.

Breach of the 23,605 support will drag the index down to 22,225.

Global cues

The picture looks far from rosy for global markets. Many indices have returned to their February lows, after an attempt to claw higher in March. The CBOE volatility index has formed a new range between 20 and 25 over March, implying that volatility will continue for a few more months.

The Dow Jones Industrial Average has moved closed to its February low. Any further fall will drag the index to 22,200 or 21,000. The dollar index too needs a close watch in the weeks ahead. It is oscillating around 88, that is a key support. Once this level is breached, 85 or even 79 is likely. A weak dollar is good for stocks and a fall in dollar could be accompanied by renewed bullishness in equities. On the other hand, dollar strength will bring back volatility.

Published on April 07, 2018
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