Technical Analysis

Index outlook: Indices reverse from a key base

Yoganand D | Updated on February 25, 2019 Published on February 25, 2019

The Sensex and the Nifty could face challenges in sustaining the momentum

Last week, the domestic indices — the Sensex and the Nifty 50 — started on a back-foot, declining initially. But buying spree in the later part of the week helped the indices recover smartly to end the week marginally on a positive note. Investors should tread with caution this week, ahead of February month derivatives expiry; short-covering could keep the indices choppy.

What to watch
  • February auto sales data
  • February derivatives expiry
  • Rupee movement
  • US GDP

Positive February month auto sales numbers could provide a breather to the Nifty Auto index that is hovering near the 52-week low. On the global front, the US and Canada’s GDP numbers and the US-China trade talks can keep the markets on the edge. Hence, traders should continue to tread with caution.

Nifty 50 (10,791.6)

The Nifty 50 index found support at 10,600 and bounced up last Wednesday, snapping eight consecutive declines. The index had advanced 67points or 0.63 per cent last week, forming a hammer candlestick pattern in the weekly chart.

 

Generally, this pattern has bullish implications. Since early December 2018, the index has been consolidating sideways in a wide range between 10,600 and 11,100. Within this range, the index tests a key resistance at 10,800 and could face another resistance at 10,860, where the 200-day moving average is poised.

A strong rally above these barriers can take the index up to 10,950 and the upper boundary at 11,000. As long as the index moves sideways in the 10,600-11,100 range, the short-term outlook will be neutral.

The daily and weekly relative strength indices hover in the neutral region. Other indicators display mixed cues. Therefore, traders should remain cautious as long as the index is range-bound. An upward break-out of the range at 11,100 will change the downtrend and push the index up to 11,300 and 11,500 levels. A decisive rally beyond 11,500 can push the index up to 11,600 and 11,750.

On the downside, an emphatic fall below the key base level of 10,600 can pull the index lower to 10,500 and 10,400 in the short term. A further decline below the vital base level of 10,400 can reinforce the bearish momentum and pull the index down to the next key supports at 10,300 and the 10,100-10,000 band.

Medium-term trend: With the index continuing to fluctuate in a sideways range, there is no change in the medium-term trend. The trend will continue to be down as long as the index trades below the key trend-deciding level of 11,100. A strong break above this key level will alter the downtrend and take the index higher to 11,300 and 11,500.

On the other hand, a fall below the vital base level of 10,400 will bring back bearish momentum and pull it lower to 10,000 levels in the medium term. Next key supports are at 9,900, 9,700 and 9,500 levels.

Sensex (35,871.4)

Last week, the Sensex was volatile. After an initial decline, it took support at 35,400 and reversed higher, forming a hammer — bullish reversal — pattern in the weekly chart. However, the index faces strong resistances ahead at 36,000 and 36,400. A strong break above these levels is required to take it higher to 37,000 in the short term. But to alter the medium-term downtrend the index needs to breakthrough 37,000. Such a break can take the Sensex up to 37,400 and 37,600 over the medium term.

Inability to move beyond either 36,000 or 36,400 will keep the index range-bound in the 35,400-37,000 band. But a decisive plunge below 35,400 can drag it down to 35,000. A downward break of 35,000 will reinforce the bearish momentum and pull the index down to 34,600. Key supports below 34,600 are at 34,400 and 34,000.

Nifty Bank (26,867.5)

Underperforming the Nifty index, the Nifty Bank index added 73 points or 0.27 per cent last week amid choppiness. The index tests a key resistance at 27,000. A decisive break above this level can push the index up to 27,300 and 27,500 levels. But inability to surpass the key barrier can drag the index down to 26,650 and 26,500 levels in the near term.

An emphatic plunge below 26,500 will reinforce the bearish momentum and drag the index further down to 26,000 over the short to medium term. On the upside, a break-out of 27,500 will underpin the uptrend that has been in place since last October, and take the index northwards to 27,700 and 28,000 in the short term. The medium-term uptrend will remain intact as long as the index trades above the key base in the 25,800-26,000 band.

Global cues

The Dow Jones Industrial Average posts a nine-week winning streak, after advancing 148 points or 0.57 per cent last week to close at 26,031. But the index now tests a key resistance at 26,000.

A strong rally can it take higher to 26,500 and 26,750 levels. A downward reversal from can lead to a corrective decline and the index can drop to 25,500. A further decline below this support can drag the index lower to 25,000, which is a significant medium-term base.

Published on February 25, 2019

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