Technical Analysis

Index outlook: Early signs of weakness

Yoganand D | Updated on January 13, 2018 Published on March 04, 2017



Both the Nifty as well Sensex were unable to cross key resistance levels last week

On the macro data front, the Central Statistical Office (CSO) on Tuesday reported that GDP expanded by 7 per cent in the third quarter, surprising market participants. Subsequently, the benchmark indices rose to record 52-week highs.

However, profit-booking started thereafter, that kept indices on a leash. In the coming week, investor’s reaction to the Yellen's speech on Friday could be vital. Yellen indicated that the Fed is set to raise interest rates this month if employment and other economic data hold up. Investors should also keep an eye on the assembly election results which is due on March 11. Further, a list of IPOs are lined up, which could also attract investors attention.

Nifty 50 (8,897.5)

Last week, the Nifty 50 index was volatile and traded below the key psychological resistance level of 9,000.

This week: The index rose to 8,992.5 on Thursday, but profit-booking dragged it lower and it closed on a negative note, forming a bearish engulfing candlestick pattern in that session. The index continues to face a key psychological resistance ahead at 9,000. The indicators and oscillators in the daily as well as weekly chart feature in the bullish zone. However, the indicators in the daily chart show signs of weakness and display negative divergence, indicating trend reversal is on the cards. Decreasing daily volumes are also a cause for concern.

We reiterate that this weakness, along with the psychological barrier, gives a bleak near-term picture. Further, as the profit-taking is witnessed at higher levels, investors with a short-term horizon should be on alert. If the index continues to show signs of weakness, then, investors can take some profits off the table and hold the rest with a stop-loss at 8,800 — the immediate key support level.

Slump below this base level can pull the index down to 8,725 and then to 8,600 in the coming weeks. On the upside, a decisive break-out of the significant resistance level of 9,000 can take the index upwards to 9,119 or 9,172 in the short term.

Medium-term trend: Since the December 2016 low at around 7,900, the index has been on a medium-term uptrend. However, it continues to face a key long-term resistance ahead at 9,000. Strong rally beyond this level can push the index upwards to 9,119 and 9,200 levels in the medium term.

As long as the index trades above the significant support level of 8,450, the medium-term up-trend will be intact. Subsequent supports to watch are at 8,350 and 8,250.

Sensex (28,832.4)

The Sensex fell marginally by 60 points or 0.2 per cent in the midst of choppiness last week. The index persists in testing the significant resistance level at 29,000. It has also formed a bearish engulfing candlestick pattern in the daily chart, implying a near-term correction is in the pipeline. Such near-term corrective decline can find supports at 28,750 and then at 28,500. Having said that, a decisive decline below 28,500 can strengthen the downtrend and drag the index lower to 28,300 and then to 28,000 in the short term. Subsequent key supports are at 27,500 and 27,300 levels.

If the index manages to stay above the key support level of 28,500, it can re-test the key hurdle at 29,000 levels. Strong rally above 29,000 is needed to bring back bullish momentum and take the index northwards to 29,500 or even to 30,000 in the medium term.

On the downside, plunge below the medium-term support level of 27,000 can mar the short term uptrend. Next supports are at 26,700 and 26,500.

Bank Nifty (20,495.6)

The Bank Nifty retreated 381 points or 1.8 per cent in the previous week, witnessing profit-taking. It now tests the key immediate support at 20,500 levels as well as its 21-day moving average.

On Thursday, the index slumped, forming a bearish engulfing candlestick pattern, which has short-term bearish implications. Strong downward break of 20,500 could reinforce the downtrend and pull the Bank Nifty down to 20,370 initially and then to 20,150 or 20,000 levels in the short term.

The daily indicators are showing signs of weakness. The daily relative strength index has entered the neutral region from the bullish zone. Traders with a short-term view can consider initiating fresh short positions on a strong fall below 20,500 with a fixed stop-loss at 20,640 levels.

If the index manages to move beyond 20,800, the bearish outlook will be altered. In that case, the index can trend higher and test resistance in the 21,000 and 21,042 band. Up move beyond this zone can take the index higher to 21,500 levels.

Since last December’s low of 17,606, the index has been on a medium-term uptrend. This uptrend will remain in place as long as the index hovers above 19,000. Near-term uptrend will be negated on a strong tumble below 20,000. The index can then test the supports at 19,700 and 19,500 levels.

Published on March 04, 2017
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