Technical Analysis

Index outlook: Market continues to test key barrier

Yoganand D | Updated on January 17, 2018 Published on July 23, 2016

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Inability to break through the resistance could keep the indices volatile

The corporate results dominated the equity market show last week and kept the bellwether indices in a narrow band. The market continues to hope for the passage of the Goods and Services Tax (GST) Bill in the ongoing monsoon sessions of Parliament.

With profit taking and short-covering expected ahead of the July derivatives expiry in the coming week, the broader indices could remain volatile.

While the quarterly results are likely to remain the key market driver, the FOMC (Federal Open Market Committee) meeting on July 27 can influence the movement.

Nifty 50 (8,541.2)

The Nifty 50 was volatile and closed on a flat note last week. It has been trading a narrow band between 8,475 and 8,600 over the past nine trading sessions.

The week ahead: After moving above the 8,500 mark on July 12, the index has been on a sideways move. The daily volume has been decreasing over the last week.

The daily indicators such as relative strength index and price rate of change display negative divergence, signalling a near-term trend reversal; they are also weakening. Significant resistance at 8,600, from which the index reversed last August, is limiting the upside. A slip below the lower boundary of the narrow band at 8,475 can induce profit-taking and drag the index further down to 8,400 and then to 8,300 in the short term.

We reiterate that traders with a short-term perspective should continue to tread with caution. A strong breakthrough of the key resistance at 8,600 will reinforce the bullish momentum and take the index northwards to 8,700 and 8,800 in the short term.

Traders can consider going long above 8,600 levels with a fixed stop-loss. On the other hand, the index, if it falls below 8,475, can find support at 8,400 levels. An emphatic fall below 8,400 will be cue for going short in the index.

Medium-term trend: The index has been on a medium-term uptrend since bottoming out in late February low at 6,825. However, the index has met with a key medium term barrier at 8,600.

A conclusive break out of this hurdle will reinforce the uptrend and take the index northwards to 8,800 levels. Key medium-term supports are placed at 8,300, 8,100 and 8,000. Decline below the 8,000 mark will be a threat to the uptrend and the index can fall to test the next support band between 7,800 and 7,700. We restate that investors with a medium-term perspective can hold the long positions with a stop-loss at 7,900.

Sensex (27,803.2)

The index was choppy and closed the past week on a marginal negative note, declining by 33 points. However, the short as well as medium-term trends are still up.

The week ahead: The Sensex encountered a significant resistance at 28,000 a fortnight back and continued testing it last week as well. The indicators and oscillators in the daily chart are featuring downwards, implying weakness. Moreover, the 28,000-28,500 range is an important resistance band and near-term reversal from this zone cannot be ruled out at this juncture. Else, the index could extend its sideways movement below the key resistance level of 28,000 for a while.

Immediate supports for the index are at 27,500 and 27,000. A strong fall below the 27,000 level can mar the short-term uptrend and drag the index lower to the band between 26,400 and 26,500. On the other hand, conclusive breach of 28,000 can take the index upwards to 29,000 or to 29,500 in the medium term. In the coming week, traders with a short-term perspective should tread with caution.

Bank Nifty (18,690.4)

After testing the key barrier at 19,000, the Bank Nifty fell 263 points or 1.4 per cent in the last week. The decline shows initial signs of weakness, backed by the daily relative strength index losing momentum.

A drop below the immediate support at 18,500 will bring back selling pressure and drag the index down to 18,300 and then to 18,000 levels. Traders with a short-term view can initiate fresh short positions on a plunge below 18,500 levels with a fixed stop-loss. On the upside, a strong breakout of the immediate resistance at 19,000 is needed to strengthen the medium-term uptrend and take the index northwards to 19,500 and then to 20,000 in the short to medium term. Next supports below 18,000 are at 17,830 and 17,600.

Global cues

The Dow Jones Industrial Average advanced 54 points or 0.3 per cent last week to close at 18,570.8. The index trades well above its 50 and 200-day moving averages. Key immediate supports are at 18,300 and 18,000. Continuation of the uptrend can take the index higher to 18,700 or 18,800 levels in the near future.

Published on July 23, 2016
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