Technical Analysis

Index Outlook: Bellwethers poised at key supports

Yoganand D | Updated on October 28, 2018 Published on October 28, 2018


The benchmark indices continued their decline. Will key base levels offer cushion?

The bearish cues from the US market weighed on the global markets sell-off last week. The heavy selling in US stocks had a negative effect on the European and Asian markets. The Nikkei 225 nosedived almost 6 per cent last week. The Indian market also continued its decline. While the ECB kept rates on hold while reaffirming the stimulus exit plans, the Bank of Canada raised interest rate to 1.75 per cent and also signalled more hikes in the future. This too resulted in weak global cues.

In the coming week, the continuation of the September quarter results and October auto sales data are key events on the domestic front. On the international front, the Bank of Japan meeting and US jobs data are some major events. These along with the dollar-rupee movement and the crude oil price action need a close watch. As the bellwether indices — the Sensex and the Nifty — are poised at crucial support areas, investors should tread with caution.

Nifty (10,030)

The key support at 10,100 cushioned the index until Friday, but a strong fall of about 1 per cent on that session breached this base. The index slumped 273 points or 2.7 per cent in the previous week. It is now likely to test the psychological support at 10,000.

Short-term trend: The short-term trend has been down for the index since recording an all-time high at 11,760 in late August. The index breached key supports at 11,000 and 10,500 while trending down.

Moreover, the index trades well below its 50- and 200-day moving averages. Last week, it slipped below the 10,200-10,300 base range and is now on the brink of testing support at 10,000.

The daily relative strength index continues to feature in the bearish zone and the weekly RSI also hovering in this zone implies bearishness. Further, the daily as well as weekly price rate of change indicators feature in the negative terrain implying selling pressure. Although the index could test a key support, there are no signs of trend reversal.

A downward breakthrough of the 10,000-level can intensify the selling pressure and drag the index down to next supports at 9,800 or 9,700 levels in the short term. An upward reversal from these supports can arrest the downtrend that commenced in August. From the August peak, the index tumbled more than 14 per cent.

A strong rally beyond the key immediate resistance at 10,300 is required to alter the near-term downtrend and take the index higher to 10,400 or 10,500 levels. That said, the index has crucial trend-deciding resistances at 10,700 and 10,800.

A conclusive break above 10,800 is needed to alter the downtrend and take the index northwards to 11,000 and 11,100 levels. With the index poised near the vital base level of 10,000, investors needs to tread with caution in the coming weeks.

Medium-term trend: The index is now poised at a medium-term trend-deciding zone after completely retracing its prior upmove.

We reiterate that a strong plunge below the key psychological support level of 10,000 and the immediate support at 9,900 will reinforce the downtrend and drag the index down to 9,700 and 9,500 levels in the medium term.

In this scenario, the medium-term trend will be down and the next vital supports for the index will be at 9,200 and 9,000.

Conversely, an upward reversal from the current support area can take the index higher in the short term. Having said that, an emphatic breakthrough of 11,000 is needed to alter the downtrend and push the index northwards to 11,300 and 11,500 levels over the medium term.

Sensex (33,349.3)

The Sensex extended its downtrend last week by plunging 966 points or 2.85 per cent. This downmove has clearly breached key near-term supports at 34,000 and 33,600. The index could continue its fall and test support at 33,000 in the short term, which is also a key medium-term base level. A strong tumble below this base will intensify the downtrend and drag the index down to 32,700 and 32,500 in the short term.

But an upward reversal from the key support level of 33,000 can keep the index vacillating sideways for sometime in the band between 33,000 and 35,000.

Only a conclusive break above 36,500 will alter the downtrend and take the index higher to 37,000 and 37,400 in the medium term. Any corrective upmove in the index could encounter resistances at 33,800, 34,000 and 34,400 levels.

Nifty Bank (24,421)

Last week, the Nifty Bank index plummeted 664 points or 2.65 per cent, decisively breaching its key support at 25,000. The index is now poised above its key support at 24,250 from which it had bounced up in early October. The indicators in the daily chart re-entered the bearish zone, underpinning the bearish momentum. The weekly indicators also feature in the bearish zone.

A strong downward break of 24,250 can pull the index down to 24,000 and then to 23,600 in the short term.

A further fall below 23,600 can drag the index lower to the next significant supports are 23,500 and 23,000 in the medium term. On the other hand, a strong rally beyond 24,800 can take the index higher to 25,000. A conclusive upmove beyond 25,000 will pave way for the rally to extend to 25,500 in the short term.

However, to alter the downtrend that has been in place from the August peak of 28,388, the index needs to break above 26,500 levels. In this scenario, the next targets are at 27,000 and 27,500 levels. There are no initial signs of trend reversal and the possibility of the downtrend continuing is expected. So, traders with a short-term perspective should exercise caution.

Global cues

Following a pause at 25,500, the Dow Jones Industrial Average continued to decline in the previous week and has plummeted 775 points or almost 3 per cent to close at 24,688 levels. A fall below the immediate support at 24,500 can drag the index down to 24,300 and 24,000 levels. The next key support is at 23,500. Key resistances are at 25,050 and 25,500 levels. Only a strong break above 26,000 will alter the short-term downtrend and take the index higher to 26,500 levels.

Published on October 28, 2018
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