Technical Analysis

Index Outlook: Do bulls face any immediate threat?

Akhil Nallamuthu | Updated on November 28, 2020 Published on November 28, 2020

However, there seems to be no immediate threat to the bull trend

India has entered technical recession as the quarterly GDP data released on Friday showed that the country has registered a contraction of 7.5 per cent in the September quarter over the same period last year.

However, with other high frequency indicators showing a bounce back, the latest GDP number, released post market hours on Friday, is less likely to weigh on the financial markets in the forthcoming sessions. Moreover, strong foreign inflows, which have kept the markets rallying since March, show no signs of a cutback, at least until last week.

Though the Nifty 50 and Sensex registered their respective lifetime highs last week, they were largely flat, extending the sideways trend from the preceding week. That said, the benchmark indices seem to have entered a consolidation phase after a strong rally and unless the indices move out of this range, next swing in price will remain uncertain. Nevertheless, there seems to be no immediate threat to the bull trend.

 

Nifty 50 (12,968.9)

The Nifty 50, despite remaining largely flat, ended the week with a gain of 109 points i.e. about 0.9 per cent as it ended at 12,968.9 versus its previous week’s close of 12,859. While the major trend remains bullish, the index is unable to sustain above the psychological level of 13,000. Also, prolonged consolidation can increase the likelihood of a correction, even it might not be an outright trend reversal. Hence, for the bulls to extend their game, a breakout of 13,000 is necessary sooner than later.

Week ahead: The price action of the past couple of weeks shows that the Nifty 50 has been oscillating between 12,750 and 13,000. Even though the index marked a fresh all-time high of 13,145 last week, it could not stay above the 13,000-mark. Similarly, on the downside, 12,750 has been acting as a considerable support level.

In case bulls regain traction and break out of the prior high of 13,145, the index can be expected to advance towards the minor resistance at 13,200 quickly. A breach of this level can take it further upward to 13,400 in the near term.

On the other hand, if the index declines, 12,830 and 12,750 can act as considerable base. But a break below 12,750 can turn the short-term trend negative, potentially dragging the index to 12,550. This is a crucial level as the 21-day moving average (DMA) and the 38.2 per cent Fibonacci retracement level of the prior uptrend coincide.

The price band 12,520 to 12,550 can be a support band of the index. Whatsoever, the index should decisively breach either 12,750 or 13,000 to get a clue about the direction of the short-term trend. Until then, one can adopt a range-trading strategy for the short term.

Medium term: The medium-term trend is clearly bullish. It does not seem to be under trouble yet since the index stays clearly off the 50-DMA, which incidentally coincides with a key base of 12,000. As long as the index is able to survive above 12,000, the medium-term trend will be bullish. So is the long-term trend.

Between the price band of 12,520 and 12,550, and the critical level of 12,000, the index also has a support at 12,250.

Since the price movement has been horizontal for the past two weeks, indicators like the relative strength index (RSI) and the moving average convergence divergence (MACD) are hinting at bulls losing strength. While both the indicators are in their respective bullish zones, the RSI is hovering near the over-bought territory whereas the slope of MACD is turning flat from positive.

From the medium-term perspective, traders with long positions can continue to hold them until the support at 12,750 stays valid. Consider booking partial profits if the index slips below 12,750 and cut back entire longs if the support at 12,520 is breached. Fresh medium-term short positions can be initiated below 12,520. On the other hand, if the index rallies past 13,145, fresh long positions can be initiated.

Sensex (44,149.7)

The Sensex appreciated by 267 points over the past week, i.e. it gained by about 0.6 per cent. Notably, the index recorded a fresh lifetime high of 44,825 before wrapping up the week at 44,149.

The daily chart shows that it has been treading along a sideways path for the past two weeks i.e. between 43,500 and 44,500. Thus, there seems to be a tug of war between the bulls and the bears and unless either of these levels are breached, neither can dominate as the index can stay within the range.

If the bulls regain mojo and push the index above 44,500, it can easily rally past the prior high of 44,825 and head northwards to 45,700. Above that level, 46,000 can be a hurdle for the uptrend. However, if the index weakens and breaks below 43,500, the immediate support can be found at 42,670 — its 21-DMA. The short-term trend can be positive until the price trades above this level.

A break below the 21-DMA can turn the short-term outlook negative and subsequent supports can be spotted at 42,000 — the 50 per cent retracement level of the prior rally — and 41,400. On the downside, 41,000 holds the key; that is, the medium-term trend will be bearish below this level.

Nifty Bank (29,609)

The Nifty Bank index outperformed both the benchmark indices as it gained 373 points i.e. nearly 1.3 per cent during the last week. But like the Nifty 50 and the Sensex, the price action is range-bound, largely fluctuating between 28,800 and 30,000.

On the back of the major uptrend, if the index breaks out of the range and rallies, it can probably advance to 31,200 and if the momentum sustains, it can rise to 32,000. Over the medium term, it can even move past the 52-week at 32,613 and touch 33,000.

Since the trend has been flat of late, the RSI and the MACD on the daily chart have turned flat. Going ahead, if the bulls give way and the index falls below 28,800, it can find the nearest support at 28,000, where the 21-DMA coincides, making it a critical level. A break below this level can turn the near-term outlook negative, possibly dragging the index to 27,000. Subsequent support can be found at 26,200. The medium-term trend can be bullish until the index manages to trade above this level.

Global cues

The Dow Jones Industrial average, which appreciated in the first half of last week, remained flat in the latter half. That said, the index posted a gain of a considerable 2.2 per cent as it ended the week at 29,910.1 versus its previous week’s close of 29,263. Importantly, it marked a fresh all-time high of 30,116.5 last week.

The uptrend remains intact and supporting the same, the price is well above the 21-DMA and the indicators like the RSI and the MACD on the daily charts are in their respective positive territories. Hence, the index will most likely rally from here, potentially moving to 31,000 and 31,500. On the downside, key support levels are 29,500 and 29,000. The trend will be inclined to upwards until the index stays above 29,000.

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Published on November 28, 2020
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