Technical Analysis

Index outlook: Time to watch your step

Lokeshwarri S K | Updated on January 22, 2018



The Fed rate decision and outcome of Bihar elections will keep the market edgy

The week that went by was far from pleasant for the bulls. The rally from the September-low that took the benchmarks around 10 per cent higher halted abruptly and both the Nifty and the Sensex closed with losses in all five sessions. Change in global sentiment was largely responsible for the market’s volte face.

The statement released after the FOMC meeting turned out more hawkish than expected with Janet Yellen wagging a finger at the markets and saying that she will seriously consider raising rates in the next meeting scheduled in mid-December. This made investors circumspect towards all risky assets including Indian equity and debt.

Most emerging market indices have recorded sharp downward reversals last week putting the ongoing uptrend, in these indices, in jeopardy.

The movement over the next couple of weeks will decide if this is a short-term pull-back or continuation of the down-trend that began in May.

Earnings announcements will continue to buffet the market. Those who have bought shares with a short-term perspective will now have to decide if they want to continue holding on. There are now two major uncertainties before the market a) Fed action on rates in December, b) outcome of the Bihar polls. Again, given that corporate earnings are not anything to write home about and the slow progress of reforms, short-term gains will be difficult to come by.

As discussed earlier, the Sensex and the Nifty are retreating from key resistance levels. It will however be best to watch the action over the next couple of weeks to understand the market’s intentions. A shallow pull-back that halts at the current levels will keep open the possibility of a move to a new peak this calendar. Those with long-term perspective can however make the most of declines to add to their equity holding.

Nifty (8,065.8)

The Nifty lost close to 230 points last week. There is a possibility of the bearish engulfing candle in the weekly chart turning into an evening star formation. That will signal the end of the move from the 7,539 low.

Momentum indicators appear quite bearish. Daily oscillators are once again signalling a sell, thus confirming the negativity. Rate of change oscillator in the weekly chart has reversed lower in the negative zone implying lack of strength in the medium term as well.

The week ahead: Oscillators therefore signal the need for extreme caution by those holding long positions.

As explained earlier, the index had reached a critical level from a medium-term view. Reversal from here therefore means that bears continue to have the upper hand.

The 50-day simple moving average and the Fibonacci support make the zone between 8,000 and 8,050 the next support for the short term. Fresh long positions should not be initiated on a close below 8,000. For, the next targets are 7,938 and 7,846.

Any rally will face resistance at 8,160, 8,227 and 8,336. Reversal from either of the first two resistances will be the cue for initiating fresh short positions.

Medium-term trend: It is however too soon to conclude whether the medium-term downtrend has resumed. This pull-back can be the second minor of the B wave of the down-move from 9,119.

We need the downtrend to continue further to confirm that the B wave has ended at 8,336 and that wave C has begun from that level.

However, the index needs to move above 8,500 to make the medium-term trend positive. Subsequent targets will be 8,654, 8,845 and 9,119.

Sensex (26,656.8)

The Sensex too slid lower through the week to close with over 800 points loss.

The week ahead: The bearish engulfing pattern in the weekly chart means that rallies will struggle to move higher. The index will face resistance at 27,000 and then at 27,216 as it tries moving higher. Reversal from either of these levels will be the cue for traders to initiate short positions. Downward targets will be 26,435, 26,238 and 25,903.

Short-term view will turn positive only on a strong close above 26,700.

Bank Nifty (17,354.5)

The CNX Bank index declined to its first support at 17,150 last week. Rallies will face resistance at 17,500 and then at 17,708. Traders can initiate fresh shorts if the index reverses from either of these levels after a short bounce.

Downward targets will be 16,889 and 16,634.

Global cues

It was a mixed show by global markets last week. While some indices such as Argentina’s Merwal surged ahead, Brazil’s Bovespa recorded sharp losses. Indices of developed markets, including the US and Europe, moved in a narrow band at the higher end before ending on a flat note. The DJ Euro STOXX 50 closed with a doji formation in the weekly chart.

The Dow Jones Industrial Average did the same. After fluctuating in a zone between 17,550 and 17,800, the index closed almost unchanged for the week. Immediate supports for the index are at 17,260 and 16,900.

If the index continues trading above 16,900, it will keep alive the possibility of a move to the recent peak at the level of 18,351.

Published on October 31, 2015

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