Technical Analysis

Index outlook: Will the 30,000 barrier break?

Lokeshwarri S K | Updated on January 15, 2018 Published on April 30, 2017

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Past data indicates that the Sensex struggles at previous peaks followed by a sharp decline

It was an exhilarating week for investors as stock prices surged, buoyed by the outcome of the recent round of the French election, to take the Sensex to a fresh life-time peak of 30,184.22. But as we have been reiterating, it is best to tread with caution until there is a firm break beyond the 30,000 barrier.

The previous record high for the benchmark was 30,024.74, hit in March 2015; the Sensex had slid 25 per cent in the 12 months that followed, then. It is typical for psychological resistance to emerge when indices draw close to significant milestones. But if the Sensex records a sharp fall after testing a milestone, the level tends to get etched in the memories of market participants making it more difficult to surpass.

For instance, the 2008 peak in the Sensex was 21,206, recorded in March 2008. The decline from this level was one of the worst in recent times and the Sensex took a long time to surpass this level. While 21,000 was re-tested in October 2010, a breakout could happen only in 2014. Further back in time, if we look at the peak formed during the Harshad Mehta boom in April 1992, the high was 4,546. This level was tested in 1994 and 1997, but a breakout happened only in 1999. When the Sensex scaled the 5,000 level in October 1999, there was such an air of relief with balloons released from the roof of the Bombay Stock Exchange. At this current juncture, there are enough positive and negative factors that can be picked, depending on the camp you belong to. Both the bulls and the bears have enough ammunition to pull the market in either direction.

The long-term trend in the Sensex and the Nifty are certainly up. But over the medium term, the Sensex has been moving in a broad 22,000-30,000 range since February 2015. If the index is unable to break above 30,000 now, a decline of up to 20 per cent can occur. The corresponding range for the Nifty 50 is between 6,800 and 9,200.

However long-term investors need not fret as every decline is a buying opportunity. But taking short-term bets can backfire now, if the trend turns adverse. So do wait a firm breakout before turning gung-ho.

Nifty 50 (9,304.05)

The Nifty surged sharply last week to the high of 9,367.15 before closing 184 points higher.

Short-term trend: Nifty has been moving lower after hitting the high of 9,367 last week. Short-term supports for the index are at 9,260 and 9,191. Short-term investors can buy in declines as long as the index trades above 9,191. However, it is best to avoid fresh long positions on a decline below that level. Short-term trend will take a turn for the worse if there is a close below 9,075.

If the index manages to move higher again after a minor correction, the upper targets for the short-term are 9,342, 9,500 and 9,600.

Medium-term trend

As mentioned in this column, next medium-term targets, if the Nifty continues to rally, are 10,037 and 10,854. So, Nifty 50 in five-digits is possible this calendar. Key medium-term support is at 8,650. Correction targets are 8,800 and 8,650.

Sensex (29,918.4)

The Sensex has been the cynosure of all eyes this week as it gained over 500 points to scale the 30,000 peak.

But, the hesitancy around that level is a little disconcerting. Supports that need a close watch over the coming week are at 29,600 and 29,260. Fresh long positions should be avoided if the index declines below 29,260.

Short-term targets on the upside are 30,184 and 30,502.

The medium-term trend is up, and the index needs to close below 27,400 to negate this trend. Medium term targets above 30,200 are 32,455 and 36,404.

Global cues

It’s obvious that risk appetite is currently high in global markets. This is indicated by the slide in the dollar index in recent times. The dollar index has been on a sustained down-move from the peak of 103 this January to 98.9, as funds moved out of safe havens in to riskier assets.

Many global benchmarks, including the DAX, CAC and the Nasdaq Composite have been hitting record highs.

Easy central bank policies with the ECB and the Bank of Japan keeping interest rates on hold in their monetary policy, signs of revival in US consumption and revival in growth in euro zone appears to be helping indices rev up.

The Dow Jones Industrial Average that appeared to be on the verge of launching into a sustained correction in mid-April reversed smartly higher last week, moving close to its record peak of 21,169. The 20,400 level is now an important support for the index and short-term trend will be affected only if that level is breached.

Investor sentiment has also turned very upbeat in the US with the CBOE volatility index declining below 11 to 10.2 levels last week.

Published on April 30, 2017
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