Technical Analysis

Index Outlook: Will Sensex and Nifty 50 keep the bears at bay?

Gurumurthy K | | Updated on: Dec 04, 2021
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Broader view for benchmark indices Sensex and Nifty 50 remains bearish with strong resistances ahead

The Indian benchmark indices took a breather last week after having fallen in the previous two weeks. The indices saw some recovery all through the week before giving back some of the gains on Friday. The Sensex and Nifty 50 rose to a high of 58,757.09 and 17,489.8 respectively on the back of the strong GDP data released last week. India grew at a rate of 8.4 per cent in the second quarter. However, the impact of the growth number was short-lived and the benchmark indices fell-back in the final trading sessions last week. Sensex has closed the week at 57,696.46, up 1.03 per cent. Nifty was also up 1 per cent for the week and has closed at 17,196.7.

Among the sectors, the BSE IT index outperformed others by surging 3.58 per cent last week. The BSE Consumer Durables index rose 2.8 per cent while the BSE Health Care index was the worst performer for the week and was down 1.86 per cent.

An important event to watch this week will be the Reserve Bank of India’s (RBI) monetary policy outcome on Wednesday (December 8). Amid the emergence of the new coronavirus variant, Omicron, and the stimulus taper already in place in the US, it will be interesting to see what the RBI has on its plate for the markets. RBI will also have to factor recent comments from Fed Chairman Jerome Powell that the Fed will discuss in its December meeting whether to accelerate tapering and winding it up earlier than planned.

FPIs sell-off

Foreign Portfolio Investors (FPIs) remained net sellers of Indian equities for the second consecutive week. They sold $2.08 billion in the equity segment last week. In the last two weeks they have pulled out $3.78 billion from the Indian equities. As long as the FPIs continue to sell, any rise in the Sensex and Nifty will be short-lived.

Nifty 50 (17,196.70)

The fall to 16,500 mentioned last week has not happened. Instead, the Nifty 50 index bounced back well from the low of 16,782 and rose to a high of 17,490 last week. The index has come off from this high and closed the week up by 1 per cent at 17,196.70.

The week ahead: Near-term resistance for the Nifty will be in the 17,500-17,600 region. Above this, 17,800 will be the next strong resistance. The bias is bearish. The upside could be capped at 17,500-17,600 itself or 17,800 if a break above 17,600 is seen. Psychological support will be at 17,000. A break below it can drag the Nifty down to 16,600 this week.

Medium-term outlook: The region between 17,800-18,000 is a strong resistance. As long as Nifty trades below 18,000, the outlook is bearish. A break below 16,600 can drag the Nifty down to 16,000-15,500 and even 15,000 over the medium term. An intermediate bounce from 16,000 to 16,500-17,000 cannot be ruled out before the index touches 15,500-15,000 on the downside. Thereafter, a fresh rally can begin.

Trading strategy

Last week we had recommended to take short positions at 17,026, 17,200 and 17,400. The average entry rate of this trade is at 17,208. Retain the stop-loss at 17,800 and follow the same strategy given last week. That is, trail the stop-loss down to 17,050 as soon as the index falls to 16,600. Move the stop-loss further down to 16,700 when the index touches 16,400. Book profits at 16,200.

Sensex (57,696.46)

The strong bounce from the low of 56,382.93 last week lost momentum in the final trading day. Sensex had come off from the high of 58,757.09 to close the week 1.03 per cent higher at 57,696.46.

The week ahead: The level of 59,000 will act as a good support-turned-resistance. Higher resistance above it is at 60,000. The outlook is bearish. Support is in the 57,000-56,800 region. We expect Sensex to break below 56,800 and fall to 56,000-55,000 in the short term.

Medium-term outlook: The correction is likely to remain intact as long as the Sensex stays below the 59,000-60,000 resistances. As mentioned last week, the index can fall to 54,000 and even 52,000 in the coming weeks. Thereafter a fresh rally is likely to begin. The price action in the 54,000-52,000 region will need a close watch.

Nifty Bank (36.197.15)

The Nifty Bank managed to sustain above the 200-Day Moving Average (DMA) support (currently at 35,696) last week and witnessed a bounce as expected. The index rose to a high of 36,844 on Friday and has come off sharply from there. It closed the week at 36,197.15, up 0.48 per cent.

The broader view continues to remain bearish. Strong resistance will be in the 37,000-37,200 region that can cap the upside. Intermediate resistance is also at 36,400. We can expect the Nifty Bank index to break the 200-DMA support (currently at 35,696) and see a fresh fall to 34,800 and 34,650. A break below 34,650 can drag it further lower to 34,000.

In case the index breaks above 37,200, though less probable, a rise to 37,750 or 38,300 can be seen.

Trading strategy

Last week we had suggested to take short positions at 36,025 (30 per cent), 36,300 (30 per cent) and 36,700 (40 per cent). The average entry rate of this position is at 36,378. We retain the same strategy as mentioned last week. Maintain the stop-loss at 37,600. Trail the stop-loss to 36,300 as soon as the index falls to 35,400. Move the stop-loss further down to 35,700 as soon as the index touches 34,700. Book profits at 34,200. We reiterate that traders holding this trade may have to wait patiently to attain the target.

Global cues

The Dow Jones Industrial Average (34,580.08) fell to test 34,000 in line with our expectation. The index made a low of 34,006.08 and has risen back well from there. The coming week is going to be crucial to see if the Dow can continue to sustain above 34,000 and surpass 35,000 decisively. Such a rise will ease the downside pressure and can take the Dow to 36,500-37,000 again. Inability to break above 35,000 can keep the Dow under pressure to break 34,000 and fall to 33,500-33,000.

Published on December 04, 2021

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