Technical Analysis

Index outlook: Investors should tread with caution

Yoganand D | Updated on January 09, 2018 Published on August 19, 2017



The indices witnessed a corrective rally, but there could be selling at higher levels

Due to easing geo-political tension, investors’ sentiment improved despite the US Fed's minutes indicating uncertainties on the rate hike front. Short-covering, bargain hunting in the mid and small-cap segment and corporate actions such as Infosys share buyback and the company’s CEO resigning, kept the markets volatile and action packed the previous week. The corrective rally in the indices was also backed by buying interest shown by domestic institutional investors (DIIs), while foreign portfolio investorsremained net sellers.

Investors will keep an eye on the three-day annual summit in Jackson Hole, Wyoming, that begins on Thursday, where central bankers from around the world will be gathering to discuss about the economy. Other macro data such as Japan’s Nikkei manufacturing PMI, US manufacturing & services PMI and US initial jobless claims could impact the global markets.

Yet another truncated week ahead and long weekend could see unwinding in futures and options positions in the key indices and stocks. Hence, traders should remain vigilant towards the fag end of the week.

Nifty 50 (9,837.4)

The Nifty 50 index took support at 9,700 and witnessed a corrective rally, gaining 1.3 per cent in the truncated week.

Short-term trend: Following a sharp fall in a short span, the Nifty index found support at 9,700 and saw a near-term corrective rally surpassing the immediate resistance level of 9,800. However, the index encountered resistance at around 9,900 and resumed its short-term downtrend at the end of the week. The corrective rally was triggered by short-covering in the index as well as buying interest seen in FMCG and metal stocks.

But, the selling pressure from the Bank and IT sectors capped the corrective rally, thus keeping the short-term downtrend in place. Going forward, the corrective rally in the index can encounter resistances at 9,900 and 10,000 levels. Inability to move above 9,900 can bring the selling pressure back and pull the index down to 9,700 levels once again.

An emphatic downward break of the key base level of 9,700 can reinforce the bearish momentum and pull the index down to 9,500 in the short term. We reiterate that the investors with a short-term perspective should tread with caution. Also, avoid taking fresh long positions as long as the index trades below 10,000 levels.

As the index witnesses selling pressure in the band between 9,900 and 10,000, a strong rally beyond 10,000 is required to renew the bullish momentum and push the index northwards to 10,100 and 10,200 levels in the short term.

Medium-term trend: Last week’s rally appears to be a corrective up-move of the recent sharp fall. Forthcoming week’s movement is vital to resolve the direction of medium-term trend.

The indicators in the weekly chart are charting down, showing signs of weakness. Investors with a low-risk appetite can consider taking some profits in corrective rallies.

Strong rally above 10,000 can be a continuation of the medium-term uptrend and take the index higher to 10,200, 10,854 and 11,360 in the medium term. That said, if the Nifty index plummets below 9,500, it will be a sign of weakness.

In that scenario, the index can trend down to 9,300 and 9,120 in the medium term. If the significant support at 9,500 hold, the index can consolidate in the wide range between 9,500 and 10,000 for some time.

Nifty Bank (24,074.4)

The Bank Nifty was choppy and marginally gained 88 points or 0.37 per cent last week. The index continues to test the 50-day moving average and a key support at 24,000 levels.

On the upside, the broken support-turned-resistance at 24,500 limited the index rally in the previous week. As the index trades between a key support at 24,000 and resistance at 24,500, traders with a short-term perspective should tread with caution as long as the index remains in this range.

An emphatic breakout of this range will provide short-term direction for the index. Strong slump below 24,000 can bring back selling pressure and drag the index down to 23,700 and 23,500 levels in the near term. Traders with a short-term view can initiate fresh short positions in such a scenario, while maintaining a stop-loss at 24,200 levels.

Continuation of the decline below 23,500 can pull the index down to 23,220 and 23,000 over the medium term. That said, a conclusive upward breakthrough of 24,500 can push the index higher to 24,700 and then to 25,000.

Sensex (31,524.6)

Last week, the Sensex was volatile and managed to advance 311 points or 1 per cent. However, the index failed to move beyond the 50-day moving average and closed slightly below it.

The Sensex faces key resistances at 31,800 and 32,000. Only a decisive break above 32,000 will bring back bullish momentum and take the index northwards to 32,500 in the short term.

Conversely, if it declines below the immediate base level of 31,200, the index can test a medium-term support at 31,000. Such a fall will keep the short-term downtrend intact. Further fall below 31,000 can pull the index down to 30,800 and 30,500 in the near term.

As long as the index trades above the key support level of 30,000, the medium-term uptrend will continue to be positive.

Subsequent support is at 29,500. Key resistance beyond 32,500 is at 33,000 for the index.

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Published on August 19, 2017
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