Technical Analysis

Index Outlook: How long can the bulls prop Sensex, and Nifty 50?

Lokeshwarri SK | Updated on: Feb 22, 2020
image caption

Indices are hovering around the 50-DMA and the momentum oscillators signal weakness

If life is a tale told by an idiot, full of sound and fury, signifying nothing, the same applies for stock markets too. The Sensex and the Nifty 50 are currently almost unchanged from the level where they began 2020 though market commentators and analysts have gone through an extremely difficult two months – first worrying over the US-Iran tension, then the Union Budget and now the COVID-19.

The precipitous fall on the Budget day that threatened to take market into a medium-term downtrend evaporated in no time as some brisk bottom-fishing, coupled with bear-squeeze, in the derivative segment helped erase all the losses.

It’s the same story in most other global markets, too, as a continuing gush of central bank-infused liquidity is making corrections quite shallow and keeping stock prices elevated.

That said, it seems a little more difficult to shrug aside the Coronavirus epidemic, with a number of new cases and fatalities mounting every day. Though equity markets are waiting to see the scale of the impact, many commodities, including crude oil and copper, have taken a hit. Also, the surge in the US dollar and gold prices indicates that investors are more worried than they appear.

The buying in Indian equities, so far in 2020, was led by foreign portfolio investors; they net purchased $3.2 billion of Indian stocks. But mutual funds have been on the back-foot, net purchasing just ₹1,800 crore so far this year.

Both the Sensex and the Nifty 50 are currently below their January peaks. The short-term chart is indicating weakness and possibility of decline in the near-term. From a medium-term perspective too, the indices are vulnerable.

The extent of the short-term correction, however, will determine the medium-term trajectory.


Nifty 50 (12,080.8)

The Nifty 50 has moved below its 50-day moving average, indicating short-term weakness.

Short-term trend:

A series of downward closes since the peak formed on February 2, along with the fact that the index is hovering below its 50-day moving average, implies weakness. This is corroborated by momentum indicators that are beginning to give a sell signal.

A weak beginning on Monday can take the index lower to 11,943, 11,908 or 11,850.

If the index attempts to rally early next week, it will face resistance at 12,246. Beyond this, the targets are 12,300 and 12,430.

If the index manages to hold above 11,850, it will mean that the short-term trend remains up and the index can attempt to move past 12,246 to 12,430 again.

Medium-term trend

For understanding the medium-term trend, please refer to the ‘Index Outlook for 2020’, published on January 4, 2020. We had written then that a correction of at least 10 per cent from the peak is possible, after the rally extends a little further, if the US-Iran situation is doused.

The counts for the year are re-produced from the above-mentioned piece.

“We are revising our medium-term counts to assume a long-term sideways consolidation since the August 2018 peak. If this is a 3-3-3-3-3 triangle, the ‘d’ wave is currently in motion that has the targets of 11,804 and 12,506. The Nifty 50 can move a little higher from here towards the second target, prior to the Union Budget, following which the ‘e’ wave of the triangle can drag it lower to 11,000 level. In other words, the range for the Nifty 50 could narrow between 12,600 and 11,000, at least in the first half of 2020.”

The rally in Nifty 50 extended to 12,430 on January 20, 2020 and the post-budget correction dragged it to 11,614.

If the ‘e’ wave is complete at 12,430, the downtrend will prolong for some more time, dragging the Nifty 50 towards at least 11,000.

However, if the index manages to hold able 11,800, it will mean that the Nifty 50 can attempt to move to 12,600 or 13,207 before peaking. That makes the next couple of weeks quite critical from a medium term perspective.

Sensex (41,170.1)

The short-term trend in the Sensex also appears weak with the index hovering around its 50-day moving average. A move lower in the initial part of the week will take the index to 40,610 and then 40,400. The short-term trend will turn negative only on a strong close below this level.

Resistances for the week will be at 41,702 and 42,000. A move beyond it will take the Sensex to the previous peak of 42,273.

Bank Nifty (30,942.8)

The Bank Nifty has been in a short-term down-trend since December 2019.

It is currently halting at an important resistance at 31,100. If this level is not crossed, the bank nifty can decline to 30,562, 30236 or 29, 703.

Move beyond 31,100 can take the index to 31,455 or 31,649.

But given the extremely weak short-term trend, the possibility of a decline is higher.

Published on February 23, 2020

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