Index Outlook: Sensex and Nifty 50 nearing an inflection point

The Indian benchmark indices have extended their rally for the fourth consecutive week. Sensex and Nifty 50 were up 1.8 and 1.7 per cent respectively last week. Both the indices have surged 10 per cent each over the last four weeks. However, as mentioned last week, it is time now to become slightly cautious rather than overly bullish at this point of time. Because the Sensex and Nifty are coming closer to their crucial trend resistances. The chances are high for the current rally to halt and turn around.

The Indian markets are closed on Monday on account of Independence Day. As such, the chances are very high to get a wide gap-up or gap-down open on Tuesday.

Among the sectors, the BSE Metals and BSE Capital Goods indices outperformed by rising 4.8 and 4.2 per cent respectively. The BSE FMCG index, down 1 per cent, was the underperformer last week.

FPI flows

The Foreign Portfolio Investors (FPIs) continue to buy the Indian equities. They were net buyers for the fourth consecutive week. The equity segment saw an inflow of $1.04 billion last week. The month of August has seen an inflow of $2.83 billion so far.

Nifty 50 (17,698.15)

The rise to 17,800-17,900 mentioned last week is happening in line with our expectation. The Nifty 50 traded on a positive note all through the week. It made a high of 17,724.65 before closing the week 1.73 per cent up at 17,698.15.

Chart Source: MetaStock

The week ahead: Crucial resistances are coming up that can halt the current rally. Immediate resistance is at 17,785. Above that, 17,820, 17,850 and 17,890 are the important resistances. Broadly, 17,800-17,900 will the strong resistance zone that can cap the upside for this week.

A reversal from this resistance zone will take the index down to the first support level 17,600 initially. A break below 17,600 can then drag the Nifty down to 17,460 and 17,380 – the next key support levels.

If Nifty breaks above 17,900, though less likely, the current rally can extend up to 18,100 and even 18,400.

Medium-term view: The 17,800-17,900 region is a strong medium-term resistance zone. In ability to breach this hurdle can drag the Nifty down to 17,200-17,000 in the next two-three weeks. The price action thereafter will be very crucial. If the Nifty manages to see a strong bounce from 17,200-17,000, then it could be bullish. In case the Nifty extends the fall to 16,500 then that will be very bearish. In that case the danger of seeing 14,500-14,000 will come back into the picture. So, the price action in the next few weeks will need a close watch. For now, we expect the 17,800-17,900 resistance to hold.

Trading strategy: Traders with a medium-term perspective can go short at 17,750 and accumulate at 17,850. Keep the stop-loss 18,220. Move the stop-loss down to 17,600 as soon as the index moves down to 17,300. Exit 30 per cent of the holdings at 16,600 and move the stop-loss for the rest of the holdings to 17,100.

Sensex (59,462.78)

As expected, Sensex has risen breaking above the resistance at 58,750 last week. The index made a high of 59,538.08 and has closed at 59,462,78, up 1.84 per cent.

Chart Source: MetaStock

The week ahead: There is very limited room left on the upside. Immediate resistance is at 59,780. Above that, strong resistances are coming up at 60,050, 60,160 and 60,350. So broadly, 60,000-60,350 will be the key resistance zone. Sensex is likely to reverse lower anywhere from this resistance zone and fall to 59,000-58,800. It will have to be seen if Sensex manages to bounce back from 59,000-58,800.

If Sensex manages to break above 60,350, it will be very bullish. In that case an extended rally to 61,500 is possible.

Medium-term outlook: As mentioned above, 60,000-60,350 will be an important resistance zone that can cap the upside for now. A fall from there and a subsequent break below 58,800 can take the Sensex down to 57,000. The price action thereafter will need a close watch. A break below 57,000 will be bearish to see 55,000. It will also bring back the danger of seeing 50,000-48,000 on the downside.

Nifty Bank (39,042.30)

The uptrend remains intact. The Nifty Bank index has risen breaking above the key resistance level of 38,700. The index made a high 39,088.90 and has closed at 39,042.30, up 2.96 per cent for the week. Nifty Bank index has surged over 12 per cent in the last four weeks.

Chart Source: MetaStock

The near-term outlook is bullish. There is room to test 40,100-40,200 from here. Whether the index manages to rise past 40,200 or not will then determine the next move. A pull-back from 40,200 can take the Nifty Bank index down to 38,370 initially. A further break below 38,370 can drag it further down to 37,500 and even 37,000 in the coming weeks.

On the other hand, if the index breaks above 40,200, it will be very bullish. In that case, it can rise to 42,000-42,200.

Trading strategy: Last week, on the long positions taken at 37,491, we had recommended to exit 50 per cent of it at 38,600. Now the revised stop-loss for the rest of the holding is at 38,200. Retain the position for the target of 39,800. Move the stop-loss up to 38,900 as soon as the index moves up to 39,400.

Resistances ahead

17,800-17,900 on Nifty

60,000-60,350 on Sensex

40,100-40,200 on Nifty Bank

Global cues

The Dow Jones Industrial Average (33,761.05) has risen breaking above the key resistance level of 33,150. Though the index has closed on a strong note, other important resistances are coming up now. Immediate resistance is in the 33,900-34,100 region. Above that, 34,450 is the next important resistance.

The chances are high for the current rally to halt in the 33,900-34,100 resistance region itself or at 34,450. A pull-back from either of these resistances can take the Dow down to 33,500 or 33,000. Thereafter, the price action will need a close watch. A bounce from 33,500 or 33,000 will still keep the trend up. But a fall below 33,000 will indicate a reversal. It will be bearish to see a fall-back to 31,000-30,000 again over the medium term.

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