Technical Analysis

Index Outlook: Indices recover from a key base

Yoganand D | Updated on August 25, 2019 Published on August 24, 2019

Both the Sensex and the Nifty witnessed a sharp fall, but supports provided cushion

The continued selling pressure in PSU banking stocks and the mid- and small-cap segments kept the bellwether indices — the Sensex and the Nifty — on selling mode last week.

The global markets were mixed during the week. Fears of a looming global recession fears and fading stimulus hopes had caused a sharp fall in the benchmarks on Thursday. However, the indices saw a respite and moved higher in anticipation of relief measures on Friday. After market hours, the Finance Minister announced a number of steps to give a push to the market and the economy. A key measure is the rolling back of the super-rich surcharge levied on capital gains in equity market for FPIs and domestic investors.

Further, the government will infuse ₹70,000 crore upfront into public sector banks to release liquidity of ₹5 lakh-crore in the market. This can bring some cheer to the market. But the escalation in the US-China trade war late last week could keep the global markets on the edge and temper down the Indian market. Investors with a long-term perspective can buy on declines.

Nifty 50 (10,829.3)

The Nifty plunged almost 2 per cent, extending the downtrend, in the last week. The index initially slumped below the key base level of 11,000 and then 10,900. But after a blip below the vital base level of 10,800, the index managed to recover from the intra-week low of 10,637 and close above this base level.

Since late July, the index has been consolidating sideways in the band between 10,800 and 11,200. It once again reached the lower end of the Bollinger Bands and tested it, indicating that recovery is possible from the oversold territory. A strong move above the immediate resistance at 10,900 will strengthen the corrective rally and take the index higher to 11,000 and then to the upper boundary at 11,200 in the near term.

Having said that, a failure to move above the 11,000-mark will keep open the possibility of the index declining below 10,800 levels. In that case, the Nifty can continue to trend downwards to 10,600 levels over the short to medium term.

On the other hand, a strong break above the key resistance at 11,200 and the 200-day moving average poised at the same level will bring back the bullish momentum, and the corrective rally can extend further to 11,400 and then to 11,500 levels. Such a breakthrough will also alter the short-term downtrend.

Medium-term trend: Ever since registering a new high at 12,103 in early June, the Nifty index has been in a medium-term downtrend. While trending down, it had breached key supports at 11,500 and 11,200 levels. To alter the downtrend, a strong break above the trend-deciding level of 11,500 is needed.

Such a break will strengthen the bullish momentum and take the index higher to 11,700 and 11,800 over the medium term. The succeeding crucial resistance for the index is pegged at 12,000 which is a psychological level to note. Conversely, a strong tumble below 10,800 levels will underpin the medium-term downtrend and drag the index lower to 10,600, 10,400 and 10,100.

Sensex (36,701.1)

The Sensex also resumed the downtrend and plummeted 649 points or 1.7 per cent last week. After marking an intra-week low at 36,102, it managed to bounce up.

The key long-term support at around 36,000 had cushioned the index. Now, it tests a support at 36,600. A range-bound move between 36,600 and 38,000 is possible in the ensuing week as well. A conclusive break above 38,000 will alter the short-term downtrend and take the Sensex higher to 38,400 and 38,600.

We reiterate that an emphatic break above 38,600 is needed to alter the downtrend that has been in place from the June high of 40,312. Subsequent resistance is placed at 39,000. A further rally above this hurdle will pave way for a rally to 39,400 and 40,000 in the medium term. However, a strong fall below the immediate supports at 36,400 and 36,000 will bring back selling pressure and drag the index lower to 35,500 and 35,000 levels in the medium term. Investors can consider taking long positions on a strong rally above 37,000 levels.

Nifty Bank (26,958.6)

The Nifty Bank nose-dived 4.5 per cent in the previous week, continuing the downtrend that has been in place since early July this year. After facing resistance at 28,500, the index continued to decline and breached a key support at 27,500.

Currently, the index tests a crucial support in the band between 26,500 and 27,000. Also, it has dropped below the lower boundary of the Bollinger Bands and tests it, indicating an oversold position. An upward reversal from the current levels and a decisive move above the near-term resistance level of 27,500 can take the index northwards to 28,000.

A further rally above this barrier will pave way for testing the significant resistance at 28,500 in the short term.

Traders should remain cautious and consider initiating fresh long positions with a fixed stop-loss only on an emphatic rally above 27,500. On the downside, a slump below 26,500 will reinforce the downtrend and drag the index lower to 26,000 and then to 25,500 levels.

An emphatic break above 30,000 is required to alter the medium-term downtrend and take the index higher to 30,500 and 31,000 in the medium term. Key resistances above 28,500 are at 29,000 and 29,500.

Global cues

The Dow Jones Industrial Average failed to move beyond the key resistance level of 26,400 and plunged 2.4 per cent on Friday. It declined 257 points, or 1 per cent, to close at 25,628.9. A further fall is possible if the index declines below the immediate support at 25,500. Subsequent supports are at 25,300 and 25,000. Resistances at 25,900 and 26,400 can cap the upside in the short term.

The Nikkei 225 managed to end in the green, gaining 226 points, or 1.4 per cent, to close at 20,710 levels. It tests resistance at 20,700. Only a strong rally above this level can push the index higher to 21,000 and 21,300 levels. Supports at 20,200 and 20,000 levels can provide base if the index slumps in the coming week.

 

Published on August 24, 2019
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