Technical Analysis

Index Outlook: Sensex tests key near-term resistance

Yoganand D | Updated on January 11, 2020 Published on January 11, 2020

Both the Sensex and the Nifty bounced back strongly last week, but now face barriers

It was a volatile week for the domestic equity indices, the Sensex and the Nifty. After an initial decline tracking the weak global markets due to geopolitical tension, the benchmark indices staged a smart recovery in the latter part of the week following other Asian markets. Commodities such as gold and crude oil were also choppy.

Stocks could stay edgy this week on fears that the geopolitical tensions could escalate. Third- quarter earnings of corporates could influence the movement in specific stocks.

Nifty 50 (12,256.8)

The index plunged strongly in the initial part of last week, but taking support at around 12,000, it bounced back, positively recouping the initial loss. The Nifty recorded a new high at 12,311 and closed well above its 21- and 50-day moving averages. However, the index tests a crucial resistance at 12,300 levels.

An emphatic break above the current resistance will strengthen the short-term uptrend and push the index higher to 12,400 and 12,500 levels in the ensuing weeks.

 

 

A failure to move beyond 12,400 can keep the index consolidating sideways between 12,000 and 12,400 for a while. The daily relative strength index (RSI) is on the brink of re-entering the bullish zone from the neutral region, while the weekly RSI continues to feature in the bullish zone. Having said that, the weekly price rate of change indicator shows negative divergence, and a sign of weakness is seen in its daily counterpart. Also, the recent volatility in the index needs a cautious approach.

On the other hand, an immediate support is placed at 12,130, and the next is at 12,000. A conclusive decline below the vital support level of 12,000 can drag the index down to 11,850. A strong plunge below 11,850, where it coincides with the 38.2 per cent fibonacci retracement level of the short-term uptrend, will start dwindling the short-term uptrend that has been in place from October 2019.

We reiterate that the index can decline further in that case and test the subsequent support at 11,700. The levels 11,550 and 11,440 are the next crucial supports to note thereafter. The short-term uptrend will remain in place as long as the index trades above the trend-deciding level of 11,500. The supports below 11,500 are placed at 11,350 and 11,200.

Medium-term trend: The index has been in a medium-term uptrend since it took support from the last September low of 10,670. An emphatic break above the immediate resistance level of 12,300 will reinforce the medium-term uptrend and take the index upwards to 12,500 over the medium term. Conversely, if any downward reversal happens, like the previous week, from the current key resistance level of 12,300, the index can decline to 12,000 once again and then to 11,800 levels. Only a strong fall below 11,500 will start weakening the medium-term uptrend and pull the index down to the key trend-deciding level of 11,200. The key supports thereafter are placed at 11,000, 10,800 and 10,700 levels. Investors with a medium-term horizon can stay invested with a stop-loss at 11,300.

Sensex (41,599.72)

Last week, the Sensex was very volatile and finished marginally in the positive territory, gaining 135 points, or 0.3 per cent. The index tests the resistance at 41,700. We restate that a breakthrough of 41,700 can pave the way for an up-move to 42,000 over the near term. A further rally above 42,000 can take the Sensex northwards to 42,500 in the short-to-medium term.

The immediate supports at 41,000 and 40,500 can cushion the index. A further decline below the vital support level of 40,000 can pull the index lower to 39,750 and 39,500 in the short term. The medium-term uptrend that has been in place since September last year will stay intact as long as the index trades above 39,000 levels.

Nifty Bank (32,097.4)

Similar to the Nifty and the Sensex, the Nifty Bank index was very volatile last week, and almost ended on a flat note, adding just 28 points. Since late November 2019, the index appears to be in a sideways movement between 31,000 and 32,500. Now, it faces a resistance ahead at 32,500. Only a strong break above this barrier will underpin the bullish moment and accelerate the index northwards to new highs. The next resistance is at 33,000.

The indicators in the daily chart are trending downwards, showing signs of weakness. Whereas, the weekly RSI features in the bullish zone and the weekly price rate of change indicator hovers in the positive terrain.

With the indicators showing mixed cues, and the index being range-bound, traders with a short-term perspective should tread with caution until the key resistance at 32,500 is surpassed. A strong rally above this level can pave the way for a rally to 33,000.

The supports for the near-term are at 31,500 and 31,000 which can arrest the corrective decline, if it occurs. Nevertheless, a conclusive decline below 31,000 will weaken the uptrend and drag the index lower to 30,500 and then to 30,000 in the short term. A further slump below the significant medium-term support level of 30,000 will start threatening the short-term uptrend.

The next supports are at 29,500 and 29,000 levels. As the index faces resistance ahead, traders with a short-term view should remain watchful and initiate long positions on a strong rally above 32,500 with a fixed stop-loss.

Global cues

The Dow Jones Industrial Average extended its up-move in the midst of choppiness, gaining 188 points, or 0.66 per cent, to close at 28,823.7. It recorded a new high at 29,009 levels on Friday, and has formed a bearish engulfing candlestick pattern in the daily chart.

The daily RSI and the price rate of change indicator are displaying negative divergence; therefore a short-term trend reversal can’t be ruled out at this juncture.

The index can witness a corrective decline to 28,500 and then to 28,300 in the near term. A strong rally above 29,000 can take the index higher to 29,300 and 29,500 over the medium term. The supports below 28,000 are pegged at 27,750 and 27,500 levels.

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Published on January 11, 2020
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