Technical Analysis

Index outlook: Market poised at a critical hurdle

Lokeshwarri SK | Updated on January 22, 2018



While indices lack strength, declines should be viewed as a buying opportunity

The RBI credit policy dominated action last week. While Indian companies and the government had been hankering for a 25 basis points rate cut, Raghuram Rajan cut repo rate by 50 basis points. Stock market’s reaction to this move was however quite tepid.

This could be due to the fact that stock prices had already run-up ahead of the policy. Investors could also be wary because the larger than expected rate cut is, in a way, an acknowledgement of the tough conditions the economy and the companies are now facing.

The main issue with the Indian market is the lack of liquidity. Foreign portfolio investors were incessantly selling through September and the tally for net sales in the month is close to a billion dollar.

This follows a pull-out of $2.5 billion in August this year, implying that there is a sustained move out of emerging market equity.

This pull-out is likely to keep stock prices on a leash at least in the short term. Unless there is clarity on when the Federal Reserve proposes to start its rate hike cycle, foreign investors are likely to be edgy, selling emerging market assets to pay back dollar loans.

But the global turbulence provides investors back home a good opportunity to home in on good domestic stocks. The rate cut will definitely help improve corporate margins, that have already benefited by falling commodity prices.

Private investments could start, albeit slowly, with rates moving lower, and consumption will also receive a leg-up. These should improve India inc’s prospects over the next few quarters.

The worst is however not over for the Indian benchmarks, going by technical chart and indices. But while the Sensex and the Nifty could move lower over the next year, this could provide investors with a good entry point.

How they oscillate

Oscillators in the daily chart have moved into the positive zone, but are hovering close to the zero line. This denotes indecision. A move in either direction is therefore possible in the near term.

Weekly indicators have halted for now. There is a mild reversal in the weekly price rate of change oscillator. We need to watch this indicator over the next couple of weeks to see if a sustainable medium-term reversal is possible.

The movement of the monthly rate of change oscillator, that is now into the negative zone, is a major worry.

The heavy negative divergence witnessed over the last year, coupled with this cross-over, is a harbinger of a possible reversal in the long-term trend.

Nifty (7,950.9)

The Nifty reversed from the intra-week low of 7,691 to near the 8,000 mark again.

The week ahead: The Nifty is once again drawing close to the important resistance zone that exists between 8,000 and 8,100. As explained earlier, there are multiple resistances converging here — one, the previous peak formed at 8,055 and, two, the floor of the gap formed on August 24 at 8,060 and, three, 38.2 per cent retracement of the entire fall from 9,119 peak at 8,138.

These resistances make the area between 8,000 and 8,150 a formidable one. Short-term investors should make fresh purchases only if the index manages a strong close above 8,150. Traders can initiate fresh shorts if there is another downward reversal from this zone.

Strong break above 8,050 can take the index to 8,207. But the ceiling of the gap at 8,225 has to be closed to signal that the worst is over for the index.

Short-term supports for the Nifty are at 7,853 and 7,736. Break of these levels can take the index to 7,688.

Medium-term trend: We retain a bearish medium-term view for the Nifty. A three wave A-B-C correction appears to have ended at 7,539 in the index. The ongoing move could either be:

a) A pull-back before the next leg downward starts;

b) Building of a base by the index before it launches its next leg upward.

The inability to move beyond 8,100 will point towards the first count whereas a strong close above 8,100 will mean that the correction is complete.

It is best to see the movement over the next couple of weeks before drawing a conclusion on the medium-term trajectory of the index. The support in the band between 7,380 and 7,500 should support the Nifty even if it starts declining rapidly. The outlook will worsen only on an emphatic fall below 7,400.

Sensex (26,220.9)

The Sensex too closed on a strong note on Thursday near its intra-week peak.

The week ahead: The Sensex faces strong resistance just ahead in the band between 26,472 and 26,730. The 50-day moving average at 26,776, the floor of the open gap at 26,730 and the previous peak at 26,687 make the area around 26,700, a formidable resistance for the index.

If the index manages to break above this level, it can reach 26,907. Supports for the week exist at 25,871, 25,500 and 24,875.

Global cues

Many global indices plumbed new lows last week before recovering to close slightly higher. CBOE volatility index hit the high of 28 before closing at 24.5. This instability in the VIX reflects the nervousness among investors.

The Dow has also been quite volatile over the past week, fluctuating in the 16,000-16,500 range over the past week. Short-term support for the index is at 16,000.

Strong decline below this level will mean that the index is heading towards the medium term support at 15,370. Conversely, the index needs to move above 16,900 to indicate a reversal in the downtrend.

Published on October 03, 2015

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