Technical Analysis

Index outlook: Stormy weather ahead

Lokeshwarri SK | Updated on January 23, 2018 Published on April 18, 2015



The reversal last week indicates that the indices lack the strength to move higher

Bears wrested the advantage from the bulls after a brief lapse on Monday when both the Nifty and the Sensex managed to slip beyond their critical hurdles.

But the pullback from the key short-term hurdles after last Wednesday has two implications. One, that the downward move that began from the 9119-peak in the Nifty and 30,025 in the Sensex continues to be in force. This move can extend further.

Two, the level of conviction among investors is very low at this juncture, making them book profits at higher levels. Global markets that seemed to be on a runaway rally were also yanked back sharply on Friday.

This was largely due to the Chinese market regulator issuing orders to curb speculative activity in the Chinese stock market on Friday. It imposed curbs on margin lending in small stocks traded over the counter and proposes to encourage short selling by increasing stock lending activity.

This move follows the China’s Shanghai Composite Index’ 32 per cent rally since the beginning of this year. The index has doubled over the last 12 months.

These measures coupled with weak earnings from US companies and concerns that Greece might be forced to exit the euro zone leading to a systemic collapse in European banks made European and US indices retract from their recent highs.

Economic data in India has been mixed. Decline in consumer and wholesale price inflation is a positive but the widening trade deficit and decline in exports is a cause for worry.

Going ahead, volatility could seep in, with investors across the globe worried about the sustainability of the current rally.

FPIs have turned net sellers in the last couple of sessions. The action of these investors, particularly if Chinese stocks sell off in the early part of the week, will be interesting to watch. Investors will also turn their attention to corporate earnings that will flow in next week.

Sensex (28,442.1)

The Sensex hit the high of 29,094 and then reversed lower.

The week ahead: The momentum indicators in the daily chart continue to be in the positive zone indicating that the short-term trend continues to be up.

Immediate supports for the Sensex are at 28,400 and 28,000. Short-term view will turn negative only if the index closes below 28,000. Next target is the 200-day moving average at 27,428.

If the Sensex manages to reverse early next week, targets are 29,094 and 29,543.

Medium-term trend: As discussed earlier, reversal from the 29,000 level means that the medium-term trend continues to be under threat. If this is the third leg of the fall from 30,025, then the downward targets are 27,377 and 26,317.

However, we need to wait for the index to decline below 28,000 to determine whether there could be further weakening.

Nifty (8,606)

The Nifty recorded the intra-week high of 8,844 before reversing lower last week. These short-lived moves beyond important hurdles are not uncommon and highlight the need for placing stop loss slightly above the resistance level. It also pays to have time-filters to prevent a position getting stopped too soon.

The week ahead: The extreme short-term trend in the Nifty is currently down. It can move lower to 8,560 or 8,490 in the early part of the week. Watch out for reversal from the zone around 8,500. The short-term trend will reverse lower only on a close below this level.

Next target for the index is 8,269. The 200-day moving average at 8,240 will also support the index if it crashes below 8,500.

Resistances for the week will be at 8,700, 8,845 and 8,907.

Medium-term trend: The medium-term trend in the Nifty is appearing vulnerable as the index failed to cross above 8,800 convincingly. Weakness in the weekly momentum indicators that are signalling a sell and are in the bearish zone is also a matter of concern

If this is the third leg of the down-move from 9,119-peak, the index can decline to 8,364 and 8,077. However, it will be best to wait for a strong close below 8,500 before concluding that the going can get worse.

A strong move beyond 8,850 is needed to mitigate the bearishness.

Global cues

Most global indices lost some ground last week, largely due to the sharp decline on Friday. Most European indices such as the CAC, DAX and the FTSE lost more than 1 per cent in that session. But while the short-term trend looks wobbly, the medium term trend in these indices continues to be up.

The Dow hit the intra-week high of 18,160 before closing at 17,826. The index has been moving in a narrow band between 17,500 and 18,300 since the beginning of March.

A close below 17,500 is required to signal that the short-term trend in the index is reversing lower.

Many Asian indices, besides the Shanghai Composite, such as Sri Lanka’s all share index, Seoul Composite Index, Straits Times Index and Hang Seng too zoomed higher last week.

Published on April 18, 2015
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