Technical Analysis

Index Outlook: Will Sensex and Nifty see more red on Covid fears?

Gurumurthy K | | Updated on: Nov 27, 2021
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There is room for further fall in benchmark indices Sensex and Nifty, with possible intermediate bounces

 

It was a sea of red across the global equity markets last week. The markets ran into a sharp sell-off on the back of renewed fears on the new Covid-19 variant. While the market participants could be surprised by this sharp fall last week, it was very well in line with our expectation. We had cautioned for a steeper fall last week on the back of the possible head and shoulder reversal pattern spotted on the charts. So, we hope the readers of this column would have been on the sell/shorting side of the market.

The Indian benchmark indices remained under pressure all through the week. Both the Sensex and Nifty 50 tumbled over 4 per cent each last week. Barring the BSE Health Care (up 1.75 per cent), all other sectoral indices ended the week in red. The BSE Auto index tumbled the most and was down over 8 per cent. The BSE Consumer Durables and the BSE Realty indices were down over 6 per cent. The BSE Capital Goods and the BSE Bankex indices fell over 5 per cent last week.

Foreign Portfolio Investors (FPIs) also remained net sellers in equities last week. They sold $1.7 billion in the equity segment after buying $2.52 billion in the week earlier. If the sell-off from FPIs intensifies in the coming weeks, then the Sensex and Nifty will continue to remain under pressure for further fall.

Nifty 50 (17,026.45)

Nifty broke below the support at 17,700 and tumbled to a low of 17,280.45 on Monday itself. Though it managed to recover from that low over the next few days, the index got beaten down again on Friday. Nifty fell to a low of 16,985.7 before closing the week down by 4.16 per cent at 17,026.45 on Friday.

The week ahead: The outlook remains negative. Resistance for the week will be in the 17,250-17,300 region, which can cap the upside. Above this, 17,550-17,575 will be the next important resistance for the week. The chances are high for the Nifty to remain below 17,300 itself. A further fall to 16,500 is possible this week.

 

Medium-term outlook: The expected fall to 17,000 has happened much faster than anticipated. As mentioned above, the fall may extend up to 16,500 this week. A break below 16,500 can drag it to 16,000. The level of 16,000 is likely to hold on its first test. A corrective bounce back to 16,500-17,000 cannot be ruled out. But from a bigger picture, the outlook will continue to remain bearish. As such, the chances of the Nifty breaking below 16,000 and extending the fall to 15,500-15,000 cannot be ruled out. However, from a long-term perspective, investors should be getting ready to buy in the 15,500-15000 region rather than turning extremely bearish at those levels.

Trading strategy: Positional traders can go short now and accumulate shorts at 17,200 and 17,400. Stop-loss can be placed at 17,800. 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 (57,107.15)

Sensex has declined sharply, breaking below the key support level of 59,000 as expected. It tumbled to a low of 56,993.89 and has closed the week at 57,107.15, down 4.24 per cent.

The week ahead : The expected fall to 57,000 has happened much faster. The broad region between 58,000 and 59,000 will act as a strong resistance for the Sensex now. A sustained break below 57,000 can take the Sensex down to 55,000 in the near term.

Medium-term outlook : The medium-term outlook is likely to remain bearish as long as the Sensex remains below 59,000. The current fall has potential to target 54,000 on the downside, going forward. On the charts, 54,000-52,000 will be an important support zone to watch. We will have to closely watch for a reversal from this support zone that could mark the end of the downtrend. For now, while below 59,000, we will have to brace for a further steeper fall to 55,000 initially and then to 54,000-52,000 eventually.

Nifty Bank (36.025.5)

The Nifty Bank declined and has closed in the red for the third consecutive week. The index plummeted 5.14 per cent last week, breaking below the key support level of 37,000. Nifty Bank index has closed at 36,025.5.

For this week, an important support is at 35,700 — the 200-Day Moving Average (DMA). If the index manages to bounce from this support, a relief rally to 36,700-37,000 is possible. However, a further rise past 37,000 might not happen as fresh sellers are likely to come into the market at higher levels. As such, we expect Bank Nifty to make a fresh fall to 34,000 in the coming weeks.

The short positions recommended last week worked out well and target level was met. Going forward, traders can consider positional trades. Initiate fresh short positions in small quantity, 30 per cent of the total intended at current levels. Wait for a bounce and accumulate shorts at 36,300 (another 30 per cent) and then at 36,700 (balance 40 per cent). So, the average entry will come at about 36,378. Keep the stop-loss initially at 37,600. Trail the stop-loss down 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. Traders who are entering this trade may have to wait patiently to get the desired target level as a corrective bounce or a consolidation for some time is possible.

Global cues

The Dow Jones Industrial Average (34,899.34) has declined towards 35,000 as expected and indeed closed below it. Any bounce above 35,000 from here will be capped at 35,250 and 35,000. The Dow has room to fall further towards 34,000-33,500 in the coming weeks.

The 34,000-33,500 region is very crucial for the Dow for now. A break below 33,500 can drag it further lower towards 32,500.

Published on November 27, 2021

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