Technical Analysis

Index Outlook | Watch out for 8,400 level in Nifty 50

Lokeshwarri SK Yoganand D | Updated on May 17, 2020 Published on May 16, 2020

Short-term oscillators indicate weakness; investors should exercise caution

It is well known that stocks seldom mirror the economy. This has been apparent over the past month as stock markets surged, despite economies being in the throes of the Covid-19 pandemic.

Stock markets became cheerful as large stimulus packages were rolled out by central banks and governments to mitigate the impact of the pandemic.

Most global indices managed to recoup 30-60 per cent of the losses suffered in March.

But the party was brought to an end last week by the sombre voice of US Federal Reserve Chair Jerome Powell, who reminded everyone that “the scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II.”

His words helped remind investors that it is too soon to begin exulting about future economic recovery.

In India, the Centre has been rolling out its second tranche of fiscal measures. But it is obvious that the government is falling well short of meeting the needs of individuals as well as businesses. Macro data such as IIP (Index of Industrial Production), core sector growth, WPI (Wholesale Price Index), electricity consumption and auto sales show that the lockdown in March has taken a heavy toll.

The fallout of the extended lockdown in April and May is likely to be quite debilitating on our economy that was already in a slow lane in FY20.

With the opening of the economy likely to be staggered over the next month or so and with the Covid-19 pandemic yet to peak in India, listed companies are likely to face the heat in FY21, with earnings likely to be at least 20-30 per cent lower this fiscal.

It is best to stay circumspect with stock market investments in these conditions and do selective buying in a staggered manner.

 

 

Nifty 50 (9,136.8)

The Nifty 50 closed 115 points lower last week, establishing a lower peak at 9584.

The week ahead: The short-term trend in the Nifty 50 is extremely weak. The index has once again failed to cross above its 50-day simple moving average. The momentum indicators in the daily chart, that were beginning to perk up in April, are once again giving a sell signal.

It is clear that one part of the up-move from the 7,511 low was completed at 9,889 on April 30.

The guideposts for trading in the next few weeks are thus:

  • If the Nifty 50 holds above 9,000, on a closing basis, the short-term view will remain positive. The index can then move to 10,000 or 10,500.
  • A sharp move beyond 10,500 can take the index to 11,378.
  • If the 9,000 level is breached, the index can decline to 8,700 and 8,400. The 8,400 level needs to be breached to indicate a move towards 7,511 again.

Given the weakness indicated by the oscillators, a downward move towards the 8,400-8,500 zone is more likely.

But the bearish bias needs to be confirmed by a strong breach of the 9,000 level.

Medium term: When the Nifty 50 recorded the low of 7,511 in March 2020, it had retraced 50 per cent of the move from its 2009 low. The correction from the peak amounted to 39.6 per cent. Now, this decline is quite sufficient to qualify as a long-term correction.

So, is the correction complete? We do not have the answer to that yet. With the ongoing uncertainty about the duration and impact of the pandemic, the index is unlikely to make a dash beyond the 10,500 level yet.

A movement between 7,500 and 10,500 is more likely over the coming months as the pandemic peaks.

The medium-term view will turn positive only on a close above 10,500.

In such a scenario, the next targets would be 11,378 and 12,430.

The target below 7,511 is at 6,317. This target coincides with the 2008 peak as well as the 2010 peak.

Sensex (31,097.7)

Last week, the Sensex fell 545 points, or 1.7 per cent, amid volatility. Similar to the Nifty 50, the index failed to move beyond the 50-day moving average and closed below it, showing signs of weakness. The index currently tests a support at 31,000 and has an immediate support thereafter at 30,500.

A slump below this level will strengthen the bearish momentum and pull the index down to the 30,000 mark in the short term. A further decline below this psychological support level will underpin the downtrend and drag the index down to 29,500, 29,000 and then to 28,500 over the medium term.

On the other hand, the index has a key resistance at 32,000, the ceiling of the downward gap formed last Thursday.

A conclusive break above this barrier can lead to a corrective rally and take the index higher to 32,500 and then to 32,750.

The subsequent resistances are at 33,000 and 33,355.

An emphatic break above the second resistance can push the index northwards to 34,000 over the medium term. We reiterate that the short-term uptrend that started from the March low of 25,638 will be intact as long as the index trades above 29,500.

Investors with a long-term perspective can stay invested with a stop-loss at 27,500.

Nifty Bank (18,833.9)

The Nifty Bank extended its decline in the past week, and fell 519 points, or 2.7 per cent. It has breached the 21-day moving average and closed below a crucial support level of 19,000.

The index can test the immediate support at 18,500.

An emphatic plunge below this base will strengthen the downtrend and drag the index down to 18,000. The key supports thereafter are placed at 17,500 and 17,150 levels.

Traders with a short-term perspective can sell on rallies while maintaining a fixed stop-loss at 19,200 levels. Conversely, the immediate resistances are pegged at 19,500 and 20,000.

The selling pressure will be in place as long as the index trades below the vital resistance level of 20,530. That said, a decisive breakthrough of this hurdle will bring back bullish momentum and take the index northwards to 21,000 and 21,500 levels.

Global cues

The Dow Jones Industrial Average retraced close to 60 per cent of its previous down-move and is currently hovering around the 50 per cent mark. The most spectacular show was put up by the Nasdaq 100 that retraced almost all its losses and is just 4 per cent below its previous peak.

The CBOE VIX, after hitting the high of 85.4 on March 16, has slid all the way down to 26.

While it spiked to 41 last week, traders appear quite complacent about the prospects of the markets going ahead.

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Published on May 16, 2020
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