Technical Analysis

Index Outlook | How far can this market rally go?

Lokeshwarri SK | Updated on December 05, 2020 Published on December 05, 2020

The trend is up along all time-frames, but the Sensex and the Nifty 50 are at critical long-term targets

The Indian stock market is on a roll, with both the Sensex and the Nifty 50, scaling fresh lifetime highs last week. News about an imminent vaccine for coronavirus, positive macro numbers and the benign monetary policy took the Sensex above 45,000 and the Nifty 50 beyond 13,200. Both the benchmarks have gained over 75 per cent since the March 2020 lows, though the year-to-date gains are a little more muted at around 9 per cent.

The liquidity support provided by foreign portfolio investors, who have net-purchased stocks worth ₹1.24-lakh crore this calendar, along with purchases of domestic retail and HNI investors, is the prime driver of this rally. But high-speed macro indicators are now beginning to signal a faster-than-expected recovery, the growth in new Covid-19 cases is declining, most sectors have shaken off the pandemic blues, and September quarter earnings were also very healthy. Equity prices that discount forward earnings, therefore, have reasons to stay buoyant.

 

But most important, the US Federal Reserve, European Central Bank (ECB), Bank of Japan, et al, have resolved to maintain interest rates close to zero, and the next round of stimulus is on the anvil, too. In these conditions, it is highly unlikely for stocks to launch a serious correction, though bouts of volatility cannot be ruled out.

That said, the Sensex and the Nifty 50 are at a critical point from a long-term view. There is a possibility of a significant peak forming at these levels. The magnitude of the next leg down is therefore important in determining the medium-term trend.

Nifty 50 (13,258.5)

The Nifty 50 had another strong week, managing to close above the 13,250 mark.

Medium-term outlook: Based on Elliott Wave counts, it is now obvious that a long-term correction was completed in the market crash in March 2020. The decline made the index lose 40 per cent from the pre-Covid peak and it also retraced 50 per cent of the up-move from 2009-lows. In other words, the severe market decline that could have lasted many years was completed in just a few weeks.

With the Nifty 50 scaling the peak of 12,430, it is clear that the third wave from the 2009-low is now in motion. The minimum long-term target for this wave is 13,623 and then 17,402. The index is very close to the first target — therefore, caution is necessary here. However, a breach of 14,000 will bring 17,402 in to play.

The key medium-term support is in the zone between 10,800 and 11,100. The medium-term view will turn negative only on a close below 10,800. The next supports are at 10,170 and 10,000.

Short-term outlook: The short-term trend is currently very strong and the index can attempt to move higher to 13,500 or 13,623. If the area between 13,500 and 13,600 is surpassed swiftly, there could be a run towards 14,000 and 14,838.

However, abundant caution needs to be exercised around 13,600 as it also tallies with some long-term counts.

Key-near term supports are at 12,320, 11,900 and 11,740. The bullish short-term bias will continue as long as the index trades above the first support.

Sensex (45,079.5)

The Sensex also completed a long-term corrective move in the March decline, and the third wave from 2009 low is currently unfolding. The targets for this long-term move are 45,431 and then 58,061. In other words, the first target has been achieved by the Sensex. The possibility of the up-move continuing towards 58,000 remains as long as the index does not breach 36,300. The next medium-term supports are at 34,575 and 33,276.

From a short-term perspective, too, the Sensex has a key target around 45,000, which was achieved on Friday. The movement over the next couple of weeks is therefore important to see if the index moves on to 46,613 and then 50,039.

Key short-term supports are at 41,822, 40,389 and 39,809. Traders can continue their long positions as long as the index trades above 41,822.

Global cues

The trend in US equities continues to be very strong. The S&P 500 index completed around one-third retracement of its up-move from the 2009-low in March, and the index is now consolidating almost 10 per cent above its March peak.

There is no sign of weakness and the index could move a little higher before falling back to the 3,200-3,300 zone, which will now turn in to a support.

Stocks in Europe are not so gung ho. The Euro STOXX 50 index is trading 8 per cent below its February peak and has been trading in a range since June.

The performance of other emerging markets has been mixed, with indices such as South Korea’s Kospi and China’s Shanghai Composite trading well above their pre-Covid peaks, while many others are trying to recoup the losses.

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Published on December 05, 2020
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