Technical Analysis

Index Outlook | How long can 8,555 hold in Nifty 50?

Lokeshwarri SK Yoganand D | Updated on March 14, 2020 Published on March 14, 2020

Action over the next two weeks is critical in deciding the medium-term trajectory

March 13, 2020, is one of those trading days which will remain etched in the memories of all investors for years to come.

The dramatic decline of 10 per cent in the indices, followed by a trading halt, and an exhilarating rebound of almost 18 per cent from the day’s low left everyone gaping. This dramatic session followed a week of high volatility caused by a sharp decline in crude prices, the WHO declaring COVID-19 a pandemic and many more countries reporting a rapid increase in the number of cases and mortality.

While the week ended on a positive note with strong recovery in all markets following promises of large stimulus support by the US, Germany and other countries, the action in the coming sessions will decide if the market has bottomed or not.

The positive takeaway is that a large correction, though in a very short time-span, has met some long-term Fibonacci retracement requirements. For instance, in the Dow Jones Industrial Average, the reversal on Friday occurred after the index had retraced 38.2 per cent of the move from 2009 low. The retracement in a few other European indices such as the FTSE 100 is even deeper, up to 61.8 per cent.

The Nifty 50 and the Sensex have also halted at critical long-term levels. If the low formed on Friday holds, we could get a very broad trading range for the next couple of years, before the uptrend resumes.

But a break below Friday’s support will bring the bears out once again.

Nifty 50 (9,955.2)

The Nifty 50 closed over 9 per cent lower last week, accompanied by large volume.

The week ahead: Investors may have been exuberant at the manner at which the Nifty 50 moved on Friday. But unfortunately, the rapid move has completed 38.2 per cent retracement of the decline from the January 20 peak. Friday’s high of 10,159 is an important resistance for the Nifty 50 this week. The open gap between 10,040 and 10,294 also poses a hurdle to the index.

You can, therefore, wait for a close above 10,294 before making any bullish bets for the short term.

If the index manages to close firmly above 10,294, the next targets are 10,500 and 10,950.

But it is quite likely that the Nifty 50 loses some ground after a minor upmove in the early part of the week. The downward targets are 9,600, 9,200 and 8,555.

Medium term: The Nifty 50 clearly established a long-term down-move last week with the close below 10,000. What is more interesting is that the index has retraced around 38.2 per cent of the entire move from the 2009-low, when it hit the low of 8,555 last Friday.

In other words, a long-term correction could be complete, even without any of us realising it. There are two possible trajectories for the index now.

One, the bottom formed on Friday could be a lasting one. In that case, the index could move towards the 12,430 peak, but will not move much beyond it.

There could be a broad trading band between 8,500 and 12,500, lasting a couple of years. This is the positive scenario for the long term.

The second scenario is that the Nifty 50 breaks below 8,555 after a few weeks of lacklustre trading that does not take it beyond 11,000. In this case, we can begin looking lower at 7,485 or 6,317. The second target coincides with the 2008 peak as well as the 2010 peak.

Sensex (34,103.48)

In the turmoil last week, the Sensex plummeted 3,473, or 9.2 per cent. The gain of 4 per cent on Friday amid a wild swing of 16 per cent intra-day had helped the index stage a smart recovery and cut its weekly losses marginally.

Putting a temporary halt to the recent sharp fall, the Sensex on Friday formed a piercing line candlestick pattern, which is a bullish reversal pattern.

The index has a key near-term resistance in the 34,472-34,770 zone. A strong breaking above this zone can push it higher to 35,100 and then to 35,500 which will still be a corrective rally. The next resistance is at 36,000.

If the index manages to surpass these barriers, it can trend upwards to 36,950 over the medium term. The key supports to note are at 33,500 and then 32,800. But, a tumble below these supports can drag the index down to 31,500 and then to 29,500 levels.

 

 

Nifty Bank (25,166.4)

The Nifty Bank has nosedived 2,635 points, or 9.5 per cent, in the previous week. The index is poised testing a key resistance at 25,000. A strong break above this level in the coming week can take it higher to 25,670 and then to 26,000.

The daily indicators and oscillators are recovering from the oversold territory. A further breach of these barriers can extend the corrective rally to 26,500 and then to 27,090.

The subsequent resistances for the index are at 27,200 and 27,600. Conversely, if the index fails to move beyond the significant resistance at 26,500, it can keep the selling pressure intact and drag the index down to 24,500 and then to 24,000 levels.

The vital supports below 24,000 are pegged at 23,540 and 22,720. Traders can initiate fresh long positions if the index manages to stay above the 25,000 level with a fixed stop-loss. However, consider booking profits quickly as the index will remain choppy for a while.

Global cues

The Dow Jones Industrial Average index gained 1,985 points or 9.36 per cent on Friday, but it finished the week in the red, tumbling 10.3 per cent to close at 23,185. The index faces a key resistance ahead at 23,328.

A break above this level can take it higher to 24,000 and then to 24,600. The crucial short-term resistance for the index is pegged at 25,500. A decisive rally above this level is needed to push the index higher to 25,226 and then to 25,500 levels.

On the other hand, resumption of the down-trend can take a support at 22,500 and then at 22,000. The subsequent supports are at 21,500 and 21,150 levels

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Published on March 14, 2020
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