Technical Analysis

Index Outlook: How far can Sensex and Nifty 50 fall?

Gurumurthy K |BL Research Bureau | Updated on: May 14, 2022

The sell-off intensifies in the indices and any bounce from current levels will be short-lived

The sell-off in the Indian benchmark indices intensified last week. Both the Sensex and Nifty 50 fell over 3 per cent each last week. Both indices have tumbled over 7 per cent each in the last couple of weeks. The broader outlook continues to remain bearish. Both the Sensex and Nifty have more room to fall in the coming weeks.

All the sectoral indices also closed in red last week. The BSE Metals and BSE Power indices were beaten down the most. The indices were down 13.22 and 12.9 per cent respectively.

The sell-off from the Foreign Portfolio Investors (FPIs) also increased last week. The FPIs sold $2.43 billion in equities last week. With this, they have pulled out $3.27 billion from the Indian equity segment in May.

What to watch
Supports at 15,500 and 15,120 on Nifty
Supports at 50,500 and 50,000 Sensex
Support at 32,500 on Nifty Bank

Nifty (15,782.15)

The expected corrective bounce to 16,715 mentioned last week did not happen. Instead, Nifty faced resistance at 16,400 itself and struggled to break above it. The fall to 15,850 had happened without seeing the corrective rise. Nifty made a low of 15,735.75 and has closed the week at 15,782.15, down 3.83 per cent.

The week ahead: Immediate support is at 15,700. If the Nifty manages to hold above it, a bounce to 16,060 can be seen initially. A break above 16,060 will see the rise extending up to 16,380. These two levels of 16,060 and 16,380 are the important resistances to watch for this week. Considering the sharp fall after the gap-up open on Friday, the chances are high for the Nifty to remain below 16,060 itself.

A break below 15,700 can take the Nifty down to 15,500. A further break below 15,500 will see a steeper fall to 15,100-15,000 in the coming weeks.

Trading strategy: Go short now and on a rise at 15,940. Keep the stop-loss at 16,140. Trail the stop-loss down to 15,680 as soon as the index falls to 15,560. Move the stop-loss further down to 15,340 when the index touches 15,270 on the downside. Book profits at 15,140.

Medium-term outlook: The levels 15,500 and 15,120 are important supports from a medium-term perspective. The 21-Month Moving Average is at 15,500 and a trend line support is at 15,120. As such, the chances are high for the Nifty to bounce from the 15,500-15,000 region. That bounce can take it up to 16,000 and 16,500. However, the broader trend will continue to remain down. A reversal again from 16,000-16,500 can drag the Nifty down to 14,500 over the medium term. The region between 14,500 and 13,500 is a strong support zone from where a fresh leg of long-term rally can begin. As such, long-term investors can start buying around 15,000 in small amounts and accumulate as the index falls down to 14,500-13,500.

Trading strategy: Positional traders can hold the short positions taken at 17,171. The revised stop-loss is now at 16,900. Move the stop-loss down to 16,100 as soon as the index touches 15,600 on the downside. Book profits at 15,100.

Sensex (52,793.62)

The support at 54,400 did not hold. Sensex fell sharply breaking below this support and made a low of 52,654.89 on Friday. The index has closed the week at 52,793, down 3.72 per cent for the week.

Chart Source: MetaStock

Chart Source: MetaStock

The week ahead: Immediate support is in the 52,350-52,300 region. A bounce from this support can take Sensex up to 54,500 initially. A break above 54,500 can see an extended rise to 55,250. These two levels, 54,500 and 55,250, are important resistances that can cap the upside in the near term. The index can reverse lower again and break below 52,300. Such a break can drag the Sensex down to 50,500-50,000 in the short term.

Medium-term outlook: The 50,500-50,000 support zone may hold on its first test. As such, a corrective bounce from 50,500-50,000 to 52,000-53,000 or even higher is possible. However, the broader trend will continue to remain down. An eventual reversal will take the Sensex down to 49,000-48,000 over the medium term. The region between 49,000 and 48,000 is a strong long-term support. It will be a good buying opportunity for long-term investors.

Nifty Bank (33,121.35)

The Nifty Bank index tumbled over 4 per cent for the second consecutive week. This fall has dragged the index well below the key level of 34,000. Next support is at 32,500, which can be tested this week. If Nifty Bank manages to bounce from 32,500, a corrective rally to 34,000 is possible.

Chart Source: MetaStock

Chart Source: MetaStock

The level of 34,000 will now act as a strong resistance. So, a rise past 34,000 will be difficult. But in case the index manages to breach 34,000, an extended rise to 34,500-35,000 can be seen.

As long as the index trades below 34,000-35,000, the broader view will remain bearish. A reversal from 34,000 or 35,000 can drag the Nifty Bank down to 32,500 again. A break below 32,500 will see the fall extending to 32,000 and 31,500 in the coming weeks.

Trading strategy: Wait for a rise and go short at 33,700 and 33,950. Keep the stop-loss at 34,300. Trail the stop-loss down to 33,400 as soon as the index falls to 33,100. Move the stop-loss further down to 33,200 as soon as the index touches 32,800. Book profits at 32,600.

Global cues

It was another volatile week for the US markets. The Dow Jones Industrial Average (32,196.66) tumbled breaking below the crucial support level of 31,900 and made a low of 31,228.22 on Thursday. However, it has managed to bounce back sharply from this low, recovering some of the losses and close 2.14 per cent lower for the week at 32,196.66.

The outlook is bearish. Strong resistance will now be in the 32,800-33,000 region. Any intermediate bounce will see fresh sellers coming in at higher levels in the 32,800-33,000 region. As long as the Dow remains below 33,000, the chances are high for it to fall towards 30,500 and 30,000 in the coming weeks.

Also from a bigger picture, a decisive close below 32,200 for May will be bearish to see 29,000 on the downside over the medium term.

Published on May 14, 2022
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