Technical Analysis

Investors must tread with caution

Yoganand D | Updated on March 10, 2018 Published on July 22, 2017



The Nifty and the Sensex face key hurdles. The Fed meeting needs a close watch

The June quarter results of blue-chip companies led the bellwether indices movement last week. ITC tumbled, smoking away its gains, following the government’s move to up the cess on cigarettes under the GST regime. Better results from Wipro and Reliance Industries, however, cheered the street and pushed the indices higher. Corporate results will continue to lend direction to the market.

Investors are likely to remain cautious ahead of the Fed meeting. The market will keenly await the Fed’s comments on unravelling its $4.5-trillion balance sheet.

The Fed Reserve monetary policy announcement and the release of domestic second quarter GDP numbers will need a close watch this week.

The July month derivative expiry could also keep the markets volatile.

Nifty 50 (9,915.2)

Last week, the Nifty 50 index managed to advance 28 points or 0.3 per cent amidvolatility.

Short-term trend: Strong plunge in the index on Tuesday found support at around 9,800 and the index resumed its uptrend. However, the index continues to test the key resistance at 9,900 before heading higher to test the 10,000 levels. The index hovers well above its 50 and 200-day moving averages. But the indicators and oscillators in the daily chart are showing signs of weakness as they trend lower despite the index rallying marginally.

There has been a decrease in daily volume over the past three trading sessions. Moreover, the Nifty futures contract trades at a discount, ahead of the July month derivatives expiry this week.

The short-covering can push the index higher to test the 10,000-mark. That said, traders with a short-term perspective should tread with caution.

An emphatic fall below the immediate support level of 9,800 can pull the index down to 9,700 levels in the ensuing weeks. The index has formed a hanging man candlestick pattern in the weekly chart that indicates near-term trend reversal, which however needs a subsequent confirmation .

Although the short-term trend will be under threat only if the index declines below the key support level of 9,500, a strong fall below 9,800 will be cue for booking some profits. Key supports below 9,700 are pegged at 9,600 and 9,500. Conclusive break below 9,500 can pull the index down to 9,400 or 9,328 in the short to medium term.

Medium-term trend: There is no major alteration in the intermediate-term uptrend that has been in place since the December 2016 low of 7,893. Continuation of the uptrend and a decisive breakthrough of the psychological resistance level of 10,000 can push the index northwards to 10,626 and 12,077 in the medium term.

Investors with a medium-term horizon can remain invested as long as the index trades above the significant support level of 9,300.

Only a slip below the key medium-term support level of 9,500 will be a sign of caution. Significant supports below 9,300 are pegged at 9,100 and 9,000.

Nifty Bank (24,257)

The Bank Nifty index has advanced 319 points or 1.3 per cent in the previous week. However, the daily indicators feature in the overbought territory, indicating that a corrective decline could be in the offing. Further, the weekly relative strength index and the price rate of change display signs of weakness and negative divergence, which signify the possibility of a short-term trend reversal. Traders with a short-term view should remain cautious in the coming week.

A plunge below the immediate support level of 24,000 can pull the index down to 23,740 and 23,500 levels in the near term. In such a scenario, traders with a short-term view can consider initiating fresh short positions with a fixed stop-loss.

That said, continuation of the short-term uptrend can encounter resistance at 24,500. Strong rally beyond 24,500 can test resistance at psychological level of 25,000. Key supports to note below 23,500 are at 23,000 and 22,700.

Sensex (32,028.8)

In the previous week, the Sensex was choppy and added just 8 points. The index tests a key hurdle at 32,000. If it manages to sustain at current levels, there is a possibility of it trending higher to 32,335 and 32,500 in the short term. But inability to sustain at higher levels can pull the index down to 31,630 and then to 31,500.

The Sensex has also formed a hanging man candlestick pattern in the weekly chart that indicates near-term trend reversal, but needs an eventual confirmation in the form of a strong weekly decline. An emphatic downfall below 31,500 can drag the index down to 31,000 in the near term. Vital supports below 31,000 are placed at 30,800 and the 30,600-30,500 band. Next key medium-term supports for the index are at 30,000 and 29,500 levels.

Global cues

The Dow Jones Industrial Average has fallen 57 points to close at 21,580 last week. The daily indicators such as relative strength index and price rate of change are displaying negative divergence indicating the possibility of short-term trend reversal. With lack of strength and the index hovering above the immediate support level of 21,500, the probability of the index breaching that level is high now.

A plunge below 21,500 can pull the index down to 21,300 and 21,100 in the short term. Key resistances to note are at 21,800 and 22,000. CAC and DAX have slumped sharply in the previous week. This indicates weakness in the European markets. But FTSE 100 managed to close on a positive note.

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Published on July 22, 2017
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