Technical Analysis

Index Outlook: Indices witness selling pressure

Yoganand D | Updated on March 10, 2018 Published on September 17, 2016

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Last week, the Nifty and the Sensex ended on a negative note on fears of a US Fed rate hike

Indices fell after posting gains for two consecutive weeks. The possibility of a rate hike by the US Fed this week loomed large. Taking cues from the global markets, the bellwether indices — the Nifty and Sensex — started the previous week with a gap-down opening, falling below their key supports.

Mixed signals emerged on the domestic front. Retail inflation moved lower, raising hopes of a possible rate cut next month. But sentiment remained downbeat as industrial output contracted, painting a dismal picture of the economy.

Data released last Monday showed that the August consumer price index (CPI) slumped sharply to 5.05 per cent Y-o-Y from 6.07 per cent in July, triggered by a sharp fall in food prices. The July index of industrial production (IIP) contracted by 2.4 per cent, compared with 1.95 per cent (revised) in June. Wholesale price index (WPI), on the other hand, inched up to 3.74 per cent in August from 3.55 per cent in July.

The Bank of England kept interest rates unchanged in its recent monetary policy meeting but hinted that rates could be cut again soon. The Fed’s two-day meeting, which starts Tuesday and ends Wednesday is key global event to watch and will drive markets this week.

Nifty 50 (8,779.8)

The Nifty 50 index fell 86 points or almost 1 per cent last week, as signalled by the shooting star candlestick pattern in the weekly chart.

This week: The index was volatile on Friday and formed a doji candlestick pattern implying neutral stance. The daily relative strength index is displaying negative divergence and has entered the neutral region from the bullish zone. Additionally, the daily moving average convergence divergence (MACD) indicator, showing negative divergence, also implies trend reversal. The daily price rate of change indicator has entered the negative terrain signalling selling interest. The index decisively falling below the immediate support at 8,800 and closing below this level is a cause for worry. But it took support at 8,700 level.

However a conclusive fall below this support will reinforce the bearish momentum and pull the index down to 8,654. Further decline below 8,654 can intensify the near-term downtrend and drag the index to 8,500, putting the short-term bullish momentum under threat. Traders can consider initiating fresh short positions on a decisive fall below 8,700 levels with a stop-loss at 8,800.

Medium-term trend: As long as the index trades above the key support level at 8,000, the medium-term uptrend will be intact. The upcoming week is crucial for the index. If the fall extends, it could pull the index down to 8,500 levels. Downward break of the 8,500 mark will indicate further signs of weakness and drag the index to 8,300 in the medium term.

Conversely, an emphatic break-out of the immediate resistance level as well as the psychological 9000 mark can push the index upwards to 9,100 and 9,344. Investors can hold their long positions with a stop-loss at 8,000.

Sensex (28,599)

Last week, the Sensex was choppy and fell 198 points or 0.7 per cent, marginally outperforming the Nifty 50.

This week: The short-term uptrend that commenced in late August is under threat for the index. Strong fall below the immediate support at 28,250 can reinforce the bearish momentum and pull the index down to 28,000 in the near term. The daily relative strength index and moving average convergence divergence indicators display negative divergence, implying trend reversal. However a conclusive plunge below 28,000 levels is needed to confirm the trend reversal. The index can then decline to 27,700 and 27,500 levels.

Next resistances are at 28,941 and 29,332. A strong close above 29,000 will change the bearish stance.

Medium term trend: To alter the medium-term uptrend, the index needs to decisively fall below 26,200 levels. Targets on the rise above 29,000 are 29,130 and 30,104.

Global cues

The Dow Jones Industrial Average was volatile and advanced marginally by 38 points to close at 18,123.8. Investors stayed cautious ahead of the Fed meeting. The index trades well below its 21 and 50-day moving averages, testing a key support at 18,000 levels. Short-term outlook is negative. Conclusive fall below 18,000 can pull the index down to 17,800 and then to 17,500 in the short to medium term. Significant resistances are at 18,300 and 18,400.

Published on September 17, 2016
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