Technical Analysis

Index Outlook: Indices are poised at key base

Yoganand D | Updated on October 06, 2019 Published on October 06, 2019

Both the Sensex and the Nifty extended their corrective fall last week

The recent euphoria in the market after the announcement of corporate tax cuts seems to be waning, as the bellwether indices — the Sensex and the Nifty — tumbled almost 3 per cent last week. In its recent policy meeting, the RBI cut the repo rate by 25 basis points to 5.15 per cent — the fifth straight cut in this year, taking it to its lowest level since March 2010.

Although the rate cut was a positive, the slashing of the GDP forecast to 6.1 per cent from 6.9 per cent caused concern to investors. While falling crude oil prices and the strengthening of the rupee against the dollar can cushion the equity market, the second quarter earnings season that kickstarts this week can provide direction to the key indices. Investors should tread with caution in the ensuing truncated week.

Nifty 50 (11,174.7)

Last week, the Nifty retreated, by declining 337 points or 2.9 per cent. This fall has retraced the 50 per cent fibonacci retracement level of the prior rally. The index currently tests the 200-day moving average, poised above a key support at 11,100. A decisive fall below this base will be a threat to the short-term uptrend and will alter the trend downwards. Subsequently, the index can slip to test the psychological support at 11,000. A further decline can intensify the selling pressure and drag the index down to 10,800 and 10,700 once again over the short term.

Both the daily and the weekly relative strength indices feature in the neutral region with a downward bias. Though the daily price rate of change indicator hovers in the positive terrain, it is showing signs of weakness. The weekly price rate of change indicator has re-entered the negative terrain.

On the upside, the index has a significant resistance at 11,500, which had recently limited the rally. A strong break above this barrier on the weekly basis is required to take the index up to 11,700. It will also mean that the index has resumed the uptrend and further upside is possible. Next resistances are at 11,800 and 12,000 levels

Medium-term trend: With the recent fall in the Nifty index, the medium-term trend that began from the new high recorded at 12,103 in early June has resumed. After testing the key medium-term trend-deciding level at 11,500 last week, the index resumed its downtrend. A strong tumble below the key medium-term support at 11,000 can drag the index down to 10,700. A further decline below this level can drag it to the subsequent supports at 10,600, 10,400 and 10,100 over the medium term.

Conversely, a decisive breakthrough of 11,500 levels will strengthen the bullish momentum and take the index northwards to resistances at 11,800 and 12,000, a psychological level over the medium term.

 

 

Sensex (37,673.3)

Instead of the sideways movement, the Sensex witnessed a sharp fall last week. It had plummeted 1,149 points or 3 per cent, partially giving away the recent gains. Similar to the Nifty, the Sensex has also retraced 50 per cent fibonacci retracement level of the prior up-move. It now tests the 21- as well as the 200-day moving averages and is poised just above a crucial support level of 37,500. But a slump below this base will mar the recent uptrend and drag the index lower to 37,000 and 36,600 levels in the ensuing weeks.

However, an upward reversal from these supports can result in a sideways movement before the index takes a clear direction. Next vital supports to note are at 36,400 and 36,000. On the upside, the index needed to decisively rally above 39,000 levels. Key resistances before that are at 38,000 and 38,500 levels. A break above 39,000 will reinforce the near-term uptrend and push the Sensex higher to 39,400 and 40,000 levels over the medium term. We reiterate that investors with a medium-term horizon can stay invested with a fixed stop-loss at 36,400.

Nifty Bank (27,731.8)

The sharp two-day rally in September was short-lived as the Nifty Bank nose-dived 2,144 points or 7.2 per cent last week. This fall has almost retraced the prior rally. The index has decisively breached key supports at 28,500 and the 200-day moving average. It also managed to close below the next support level of 28,000. The index mitigated the uptrend and is currently heading south. The daily as well as weekly price rate of change indicators hover in the negative territory, implying selling interest. Both the daily and weekly RSI feature in the neutral regions. The near-term outlook is bearish. A strong fall below the immediate support at 27,500 can pull the index lower to 27,000 and 26,500.

Traders can make use of rallies to go short with a stop-loss at 28,150 levels. On the other hand, an emphatic break above the immediate resistance level of 28,000 can lead to a corrective up-move to 28,500 and 29,000. As long as the index trades below 29,500 the near-term trend will remain down. Only a break above 29,500 will bring back bullish momentum and take it up to 30,000 and 30,500 levels.

Global cues

The Dow Jones Industrial Average was volatile last week and closed in the red, declining 246 points or 1 per cent at 26,573.7. It faces resistance ahead at 26,850 and 27,000 levels. A break above the second resistance can push the index up to 27,300 and 27,500 in the short to medium term. But a decline below 26,200 can drag the index down to 26,000 and then to 25,700 in the short term.

The Nikkei 225 had tumbled 468 points or 2.1 per cent last week to close at 21,410. Near-term stance is bearish. It can decline to test support at 21,000. Next supports are at 20,700 and 20,500. Key resistances above 21,500 are at 21,700 and 22,000.

Published on October 06, 2019
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