Technical Analysis

Index Outlook: The Sensex and the Nifty edge higher...

Yoganand D | Updated on January 19, 2020 Published on January 18, 2020

...but investors should be cautious, as thereare signs of a possible trend reversal

After an initial rally in the early part of last week, the Sensex and the Nifty turned volatile but ended the week on a positive note. The third-quarter earnings will continue to be the highlight in the coming week and can trigger stock-specific movements.

Now that the Phase 1 trade deal between the US and China has been signed, global investors will focus on the policy rate decisions across the globe. Bank of Japan (BOJ), Bank of Canada (BOC) and European Central Bank (ECB) rate decisions are key global events to look forward to.

 

Nifty 50 (12,352.3)

Last week, the Nifty index surpassed the key barrier at 12,300 amid volatility. It managed to close above this level. It advanced 95 points or 0.78 per cent in the week. A continuation of the uptrend can test a resistance at 12,400 initially and then at 12,500 levels over the short term.

The index trades well above the 50- and 200-day moving averages. Also, the daily relative strength index (RSI) has entered the bullish zone from the neutral region, whereas the weekly RSI continued to feature in the bullish zone.

Both the daily as well as the weekly price rate of change indicators are hovering in the positive terrain, implying buying interest.

That said, the weekly price rate of change indicator is charting downwards, displaying negative divergence. Hence, investors should tread with caution in the coming week. The index can find a support at 12,300 initially. A further decline below this level can drag the index lower on the back of profit-taking.

The subsequent supports at 12,130 and 12,000 can cushion the index. We reiterate that a slump below the psychological support level of 12,000 can pull the index lower to 11,850.

However, a further decline below this base level will start threatening the short-term uptrend which has been in place since October 2019. Such a break below 11,850 can extend the down-move to test a support at 11,700. The next crucial supports are pegged at 11,550 and 11,440.

As long as the index trades above the key trend-deciding level of 11,500, the short-term uptrend will remain intact. The subsequent supports are placed at 11,350 and 11,200.

Medium-term trend: The Nifty reinforced the medium-term uptrend that has been in place from the September 2019 low of 10,670 in the past week and closed above the resistance level of 12,300.

The index can now head towards the key medium-term resistance level of 12,500 in the coming weeks.

A further break above 12,500 can accelerate the index northwards to 13,000 over the medium term. On the other hand, a key support is at 12,000 and a tumble below this base can pull the index down to 11,800 levels.

A fall below the next medium-term support level of 11,500 will began waning the medium-term uptrend and pull the index to the revised trend-deciding level of 11,300. The supports to note thereafter are at 11,000, 10,800 and 10,700 levels.

Investors with a medium-term perspective can stay invested with a stop-loss at 11,300.

Sensex (41,945.3)

The Sensex advanced 345 points or 0.8 per cent in the midst of choppiness last week. It tests resistance at 42,000. A decisive break above this level will pave the way for an up move to 42,500 in the short-to-medium term.

Nevertheless, an inability to move beyond 42,000 can pull the index down to 41,500 and then to 41,000 in the same time frame. The supports thereafter are placed at 40,500 and 40,000.

A strong plunge below 40,000 can drag the index lower to 39,750 and 39,500 in the short term. That said the medium-term uptrend that has been in place since September last year will remain intact as long as the index trades above 39,000 levels.

Nifty Bank (31,590.6)

The Nifty Bank witnessed selling pressure at higher levels and slumped 506 points or 1.6 per cent in the past week. The index breached its 21- and 50-day moving averages and closed below these moving averages, showing an initial sign of weakness. It currently tests a support at 31,500.

The Nifty Bank has been in a sideways consolidation phase in the band between 31,000 and 32,500 since November 2019.

A fall below 31,500 can test the lower boundary at 31,000.

The daily RSI features in the neutral region and the weekly RSI has entered this region from the bullish zone. Besides, the daily price rate of change indicator hovers in the negative terrain, implying selling interest. A fall below the immediate support will be a cue for traders to initiate fresh short positions with a fixed stop-loss.

An emphatic plunge below 31,000 will intensify the selling pressure and drag the index down to 30,500 and then to 30,000 in the short term. A further decline below the significant medium-term support level of 30,000 will start weakening the short-term uptrend.

The subsequent supports at 29,500 and 29,000 levels will come to the rescue.

Conversely, if the index manages to move beyond 32,000, it can retest the vital resistance at 32,500 again. A strong break above 32,500 is needed to strengthen the uptrend and take the index northwards to 33,000 in the short term.

Global cues

Breaking a key resistance at 29,000 in the previous week, the Dow Jones Industrial Average recorded a new high at 29,373. The index has jumped 524 points or 1.8 per cent to close at 29,348. It now faces resistance at 29,500.

A further break above this level can push the index higher to 29,700 and then to 30,000 in the ensuing weeks.

The daily RSI and the price rate of change indicator have started to chart upwards and are on the brink of entering the overbought levels. On the other hand, a fall below the resistance-turned-support at 29,000 can trigger profit-booking and can pull it lower to 28,700 and then to 28,500 in the short term. The subsequent supports are at 28,350 and 28,000 levels.

Published on January 18, 2020
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