Technical Analysis

Index Outlook: Indices poised at key hurdle

Yoganand D | Updated on January 20, 2018 Published on June 11, 2016

markets eps

After recording a seven-month high, the indices have started falling. Be cautious

Following a volatile start, domestic equity markets gained on Tuesday, despite the Reserve Bank of India maintaining status quo on key interest rates.

The benchmark equity indices surged to a seven-month high. The Sensex managed to marginally close above the 27,000-mark and the Nifty neared the 8,300-mark on Tuesday. With both these levels being significant from a medium-term horizon, the indices began to retreat after testing them.

Further, the indices have advanced 17 to 18 per cent since the end of February, prompting some profit taking at this juncture. This may continue in the coming weeks and keep pressure on the bellwether indices.

Investors are now likely to shift focus to global events such as the release of Chinese economic data, US Federal Reserve meeting that ends Wednesday and worries over Britain’s referendum on its European Union membership on June 23.

It is evident from gold gaining 5 per cent over the past couple of weeks to settle at $1,273.8 per ounce that investors across the globe are turning cautious and taking refuge in safe-haven assets.

The Index of Industrial Production (IIP) declined 0.8 per cent in April, largely on the back of a sharp fall in production of capital goods and consumer goods. The IIP had registered a growth of about 2 per cent and 0.3 per cent in February and March respectively. The fall in numbers can trigger a weak opening in the coming week and extend the decline in the benchmarks.

Monsoon and inflation could also continue to play a key role. Snapping a two-week rising streak, the Nifty declined 50 points or 0.6 per cent and the Sensex slumped 207 points or 0.8 per cent last week.

Nifty 50 (8,170)

The Nifty index marked an intra-week high at 8,294.9 on Wednesday and reversed down, facing resistance at 8,300 levels.

The week ahead: After an initial rally to near 8,300, the bears took control and the index declined marginally on profit booking. We reiterate that from a medium-term perspective, the 8,300-mark is a significant barrier and to surpass this level, a strong trigger is needed.

So, the index can pause a while before resuming its uptrend. Key support in the band between 8,050 and 8,100 can cushion the index. Any further declines can find base at the significant psychological support at 8,000. Upside reversal from these supports can take the index higher to 8,220 and 8,300 in the short term.

But the index trading above the key support at 8,000 and the 50- as well as 200-day moving averages is positive from a short-term perspective. We restate that traders with a short-term horizon can make use of the corrective decline to initiate long position while maintaining a stop-loss at 8,000.

A conclusive breakthrough of 8,300 is required to take the index higher to 8,400 and then to 8,500 in the short term. Crucial supports below 8,000 are at 7,900 and 7,800 levels.

Medium-term trend: The index continues to be in a medium-term uptrend since bouncing back strongly in late February. An emphatic break-out of the 8,300 level is required to revise the intermediate-term downtrend. Such a break can push the index higher to the 8,500 and 8,600 band in the following weeks.

However, a strong slump below the key support at 8,000 can pull the index down to 7,800 or even to 7,700 in the medium term. The next trend-deciding support for the index is in the band between 7,550 and 7,600. Investors with a medium-term view can remain invested with a stop-loss at 7,700.

Sensex (26,635.7)

Last week, the Sensex closed above 27,000-mark after a gap of seven months but subsequently started to decline, showing signs of weakness.

The week ahead: The index can extend its declines and find support at 26,500 and 26,300. The short-term uptrend will be negated only if the index plunges below the key support level at 26,000. Subsequent supports are at 25,800 and 25,500.

Medium-term support is pegged at 24,500. On the upside, the index can face resistance at 27,000. Breach of this level can take it higher to 27,500 in the ensuing weeks. But, breakthrough of 27,500 is needed to alter the intermediate-term downtrend. Next medium-term target is 28,000.

Bank Nifty (17,828.8)

The Bank Nifty continued its uptrend by climbing 147 points or 0.8 per cent in the previous week. Though this rally has outperformed the broader indices, the index tests resistance level at 18,000 and also witnesses selling pressure. On Friday, the index formed gravestone doji pattern indicating bearishness.

Traders with a short-term view can consider taking profits and stay on the sidelines. Strong break through of 18,000 can take the index up to 18,300 and then to 18,500 in the medium term. Nevertheless, tumble below the support at 17,620 can pull the index down to 17,400. Supports below this level are at 17,250 and 17,000.

Global cues

The Dow Jones Industrial Average tested key resistance at 18,000 and declined. But the index managed to close the week on a positive note at 17,865.3 with 0.33 per cent gains. Strong rally above 18,000 will pave way for an up-move to 18,300 or a new high in the near term. Key supports are at 17,500, 17,200 and 17,000.

Published on June 11, 2016
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