Technical Analysis

Index Outlook: Budget disappoints; all eyes now on RBI

Yoganand D | Updated on February 02, 2020 Published on February 02, 2020

The Sensex and the Nifty breach key supports after a steep fall; near-term outlook bearish

The key domestic equity indices — the Sensex and the Nifty — commenced the previous week on a lacklustre note and continued to trend down.

The indices took a big beating post the Budget proposals which lacked the much-awaited measures to boost growth. The proposed new income-tax regime excluding exemptions and deductions also did not go down well with investors.

The global markets continued to trend downwards on fears of the spread of coronavirus. The Dow Jones Industrial Average index tumbled 2 per cent and the S&P 500 index slumped 1.8 per cent on Friday.

The week ahead will be crucial as investors will now focus on the Sixth Bi-monthly Monetary Policy of the RBI scheduled on February 6.

On the global front, the US Federal Rserve kept the rates unchanged, but remained cautious on developments around coronavirus.

Nifty 50 (11,661.8)

The Nifty 50 plummeted 586 points, or 4.8 per cent, in the past week, dragged by a sharp fall of 2.5 per cent on Saturday due to selling pressure and profit-booking. The index conclusively breached key supports at 12,000 and 11,800. Its decline over the past two weeks indicates a reversal in short-term trend.

The index trades well below its 21- and 50-day moving averages. But the index hovers above the key trend-deciding level of 11,600 and also tests its 200-day moving average which is at 11,654.

 

 

An upward reversal from these levels can result in a corrective rally that can be capped by key resistances at 11,800 and 11,900 levels.

That said, a strong fall below 11,600 can drag the index down to 11,500 initially and then to 11,350 or 11,200 in the short term.

The daily relative strength index (RSI) features in the bearish zone and the weekly RSI has slipped in the neutral region from the bullish zone.

Besides, the daily and the weekly price rate of change indicators hover in the negative terrain, implying selling interest.

An emphatic break below 11,600 will alter the short-term trend downwards. On the upside, the key levels of 11,800 and 11,900 will act as key resistance before testing the significant psychological barrier at 12,000. Only a decisive rally above this resistance will bring back the bullish momentum and take the index northwards to 12,200 and 12,355 levels.

Medium-term trend: The medium-term uptrend that has been in place since the September 2019 low of 10,670 is under threat after the ongoing sharp decline. Moreover, the index has decisively breached the lower support trend-line of the rising wedge pattern that had been in formation since November last year.

With this downward break-out, the medium-term uptrend appears to have come to an end when the index recorded a new high at 12,430 two weeks ago. Continuation of the downtrend can test the vital support at 11,500 and then the trend-deciding level at 11,300 in the coming weeks.

A conclusive break below the second level will alter the medium-term trend downwards and pull the index down to the next supports at 11,000, 10,800 and 10,700 in the medium-term.

Investors can consider taking profits off the table at this juncture with a stop-loss at 11,300 and consider re-entering at lower levels.

Conversely, if the index moves above the immediate resistance level of 11,850, it can move higher to 12,000. Nevertheless, to reinforce the bullish momentum, the index needs to breach 12,000. The next resistances are at 12,300 and 12,500.

Sensex (39,735.5)

Last week, the Sensex nosedived 1,877 points, or 4.5 per cent, triggered by a steep fall of 987 points, or 2.4 per cent, on Saturday.

Since recording a new high at 42,273, the index has been in a decline over the past two weeks.

It had decisively breached the crucial supports at 41,000 and 40,000.

However, the Sensex tests a key support between 39,500 and 39,750. An upward reversal from this base can lead to a corrective rally to 40,000 or 40,300 in the near term. A further rally beyond these levels can test resistances at 40,500 and 41,000.

Only a strong rally above 41,000 can underpin the bullish momentum and take the index northwards to 41,500 and then to 42,000 over the medium term.

The medium-term uptrend that has been in place since September last year will remain as long as the index trades above 39,000 levels, which is a significant support to note. A plunge below this level will change the trend downwards and pull the index lower to 38,500 and then to 38,000 in the medium term.

Nifty Bank (29,820.9)

In line with the bellwethers’ decline, the Nifty Bank tumbled 1,420 points, or 4.55 per cent, in the previous week. The index breached the vital supports at 30,500 and 30,000. Also, it closed below the 200-day moving average. The short-term trend is down.

The daily RSI hovers in the bearish zone and the weekly RSI charts downwards in the neutral region.

The daily price rate of change indicator features in the negative territory, signifying selling interest, and the weekly counter-part is on the brink of entering the negative territory.

However, the index has an immediate support at 29,500.

An upward reversal from this base can keep the index in a sideways range between 29,500 and 30,500 for a while. The immediate resistances are at 30,000 and 30,500.

Only a strong rally above the significant resistance between 31,000 and 31,250 is required to alter the short-term downtrend and take the index northwards to 31,500 and 32,000 levels. The key supports below 29,500 are pegged at 29,000 and 28,500. Traders with a short-term perspective can initiate fresh short positions with a fixed stop-loss if the index fails to move beyond 30,000 levels.

Published on February 02, 2020
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