Index Outlook: Indices could remain volatile

Taking bearish cues from the global markets, the domestic benchmark indices — the Sensex and the Nifty — continued to decline in the initial part of the last week. But subsequent recovery in the global indices triggered a corrective rally.

The RBI cut the benchmark lending rate by 35 basis points to 5.40 per cent in the latest monetary policy meet. But this failed to cheer the indices and they continued to remain volatile.

A strong sentiment booster for the indices, though, was the Finance Minister calling representatives of some key sectors and foreign portfolio investors (FPIs) for meetings to seek their views before deciding on an action plan to boost the economy. But the FM has not assured the roll-back of the increase in surcharge that FPIs seek.

The government’s move to give tax relief or not to FPIscould influence the market’s direction in the coming weeks. In the truncated week ahead, investors should stay cautious as worries over the US-China trade dispute and the domestic economy linger.

Nifty 50 (11,109.6)

After an initial decline that saw it record an intra-week low at 10,782, the Nifty index took support at around 10,800 and bounced up thereafter, amid volatility. It gained 1 per cent or 112 points last week. It currently tests the 200-day moving average and faces a key resistance ahead at 11,200 levels. Both the daily and the weekly relative strength indices have re-entered the neutral region from the bearish zone.

An emphatic break above this barrier will strengthen the corrective rally and take the index higher to 11,400 and 11,500 levels in the near to short term. Failure to move beyond 11,200 can keep the index wavering in the wide band between 10,800 and 11,200 for a while. Key supports at 11,000 and 10,800 provide base for the index.

As long as the index trades below 11,500, the short-term downtrend that commenced from the June high of 12,103 will remain intact. That said, a strong break above 11,500 can alter the downtrend and take the index higher to 11,700 and 11,800 over the short to medium term. The next vital resistance for the index is pegged at 12,000.

But a strong fall below the key immediate support level of 11,000 and 10,800 will reinforce the downtrend and drag the index down to 10,600 in the short to medium term. In that case, the index will change its medium-term uptrend and fall further to the next key support level of 10,400 and 10,100.

Medium-term trend: Though the index took support in the 10,800-11,000 band and reversed higher, the medium-term uptrend continues to be under threat. A strong rally above 11,500 can diminish the threat and take the index up to 11,700 and 11,800 levels.

A further break above 11,800 will underpin the bullish momentum and push the index higher to 12,000 levels over the medium term. Conversely, if it tumbles conclusively below 11,000, that will alter the medium-term uptrend that has been in place since last October. Subsequent key supports below 11,000 are at 10,800 and 10,600.

Sensex (37,581.9)

The Sensex gained 463 points or 1.25 per cent last week, after taking support at around 36,600. The index has a key support in the range between 36,600 and 37,000.

This base zone can provide support in the near term as well. An emphatic fall below this zone will strengthen the downtrend and drag the Sensex down to 36,400 and 36,000. Next vital supports are placed at 35,500 and 35,000 levels. The index managed to close above the 200-day moving average and is in a corrective rally. It can extend the rally and test resistance at 38,000 in the truncated week ahead.

A strong break above this barrier will extend the corrective rally to 38,600 levels. But to alter the short-term downtrend, the index needs to decisively move beyond 38,600 levels. In that case, it can trend upwards to 39,000 and 39,400 levels over the short to medium term.

Nifty Bank (28,431.9)

The Nifty Bank index took support at 27,500 and moved up strongly in the midst of choppiness. It moved above a key level of 28,000 and encountered resistance at around 28,500. It advanced 227 points or 0.8 per cent in the previous week. The daily relative strength index and price rate of change indicators are recovering from the oversold territory and are likely to enter the positive zone.

The index now tests its 200-day moving average and a key resistance at 28,500. A decisive rally above this level can take the index higher to 29,000 in the near term. A further rally above this barrier will extend the corrective uptrend to 29,500 and 30,000 levels. As long as the index trades below 30,000, the short-term downtrend that has been in place since early July will remain in place.

Subsequent resistances are at 30,500 and 31,000 levels. Failure to move beyond 30,000 levels will keep the selling pressure intact and pull the index down to 28,000 once again.

A decisive plunge below 28,000 can drag the index to 27,500 and 27,000 levels in the short to medium term. We reiterate that traders with a contrarian view can consider taking long positions on a strong rally above 28,500 levels with a fixed stop-loss.

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