Technical Analysis

Index Outlook: Indices rebound from a significant base

Yoganand D | Updated on September 08, 2019 Published on September 07, 2019

The Sensex and the Nifty remained choppy last week, but key supports provided cushion

The Sensex and the Nifty fell sharply, reacting to the sharp decline in real GDP growth for the first quarter of the current fiscal and the steep fall in August auto sales numbers. But the indices recovered subsequently, taking cues from the global markets that were sanguine. Though the benchmark indices closed in the red, buying interest is visible at lower levels. In the coming truncated week, the key bellwether indices will remain choppy and look for direction from the global markets.

US stocks continued to rally last week, as China and the US agreed to resume their trade talks in October. ECB policy announcement, US retail sales and jobs data can lend direction to the global markets. On the domestic front, a strengthening rupee and weakening gold prices can boost equity investor’s sentiment.

 

Nifty 50 (10,946.2)

After a sharp fall last Tuesday, the Nifty took support at around 10,800 once again and reversed higher, trimming the weekly loss to 77 points or 0.7 per cent.

The index has formed a hammer candlestick pattern in the weekly chart, which has bullish implications. But it faces key resistances at 11,000 and 11,100 levels. An emphatic rally beyond these barriers can take the index up to the upper boundary of the sideways range at 11,200, where the 200-day moving average is also poised. The daily and the weekly relative strength indices are hovering in the neutral region.

Interestingly, the daily price rate of change indicator has decisively entered the positive terrain, implying buying interest. Since late July, it has been range-bound in the band between 10,800 and 11,200. A strong break above the upper boundary will reinforce the bullish momentum and push the index up to 11,400 and 11,500 levels over the short term. This will also mean that the short-term downtrend that has been in place in the past two months will get altered. Inability to move beyond 11,100 will keep the index range-bound.

Conversely, a decisive slump below the lower-end of 10,800 will strengthen the downtrend and pull the index lower to 10,600 levels over the short to medium term.

Medium-term trend: The index has been in a medium-term downtrend since recording a new high at 12,103 in early June. Within this downtrend, the Nifty has moved sideways.

A strong rally beyond the trend-deciding level of 11,500 is essential to change this downtrend and take the index up to 11,700 and 11,800 over the medium term. A key medium-term resistance thereafter is pegged at 12,000, which is a psychological level. Nevertheless, we reiterate that a conclusive fall below the immediate support level of 10,800 will strengthen the medium-term downtrend and drag it lower to the next vital support levels of 10,600, 10,400 and 10,100.

Sensex (36,981.7)

Last week, the Sensex was volatile and fell 351 points or 0.9 per cent. The lower boundary of the sideways consolidation in the band between 36,600 and 38,000 provided base for the index. A strong rally beyond the 200-day moving average, poised at 37,400, can take the Sensex higher to the upper boundary at 38,000.

An emphatic breakout of 38,000 will alter the short-term downtrend and push the index higher to 38,400 and 38,600. We reaffirm that a clear breakthrough of 38,600 levels is needed to alter the medium-term downtrend, which has been in place from the June high of 40,312. Next key barrier is at 39,000 and beyond this level the medium-term resistances are at 39,400 and 40,000 levels.

On the downside, a strong decline below 36,600 can drag it lower to the next supports at 36,400 and 36,000 in the ensuing weeks. Next supports are placed at 35,500 and 35,000. Investors can stay invested with a medium term stop-loss at 36,400.

Nifty Bank (27,247.9)

The Nifty Bank was choppy last week and formed a hammer candlestick patter in the weekly chart, which is a bullish reversal pattern. The index had recovered in the latter part of the previous week, trimming the weekly loss to 179 points or 0.66 per cent.

The significant support around 27,000 provides base for the index. The daily indicators such as relative strength index and moving average convergence divergence display positive divergence, indicating that a trend reversal is in the offing.

Therefore, a strong rally above the immediate resistance level of 27,500 can take the index up to 28,000. A further rally beyond 28,000 levels will extend the corrective up-move to 28,500 in the near term. Significant resistances above 28,500 are placed at 29,000 and 29,500. A decisive breakthrough of the 30,000 resistance will alter the medium-term downtrend. In such a scenario, the index can continue to trend up to 30,500 and 31,000 over the medium term.

On the other hand, a fall below current base level of 27,000 will reinforce the downtrend and extend the decline to 26,500 levels. A further plunge below this support can drag it lower to the next supports at 26,000 and 25,500 levels.

The index has been in a sideways movement between 27,000 and 28,500 over the last month and this can continue. Hence, traders with a short-term view should remain watchful. High-risk traders can go long on a strong rally above 27,500 with a fixed stop-loss.

Global cues

The Dow Jones Industrial Average extended the rally last week by gaining 394 points or 1.5 per cent to close at 26,797.4. This rally has breached a key resistance at 26,500.

The index can continue to trend up and test next hurdles at 26,800 and 27,000 in the near term. Key supports below 26,500 are at 26,000 and 25,700 levels.

Published on September 07, 2019
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