Technical Analysis

Index Outlook: Key resistances can cap the rally

Yoganand D | Updated on May 11, 2019 Published on May 11, 2019

Trade disputes, muted expectation from quarterly results and premium valuation will lead to under-performance in the near term, says a market analyst.   -  REUTERS

Both the Sensex and the Nifty tumbled sharply due to selling interest

The negative global sentiment triggered a sell-off across Asian markets and domestic markets last week. Both the Sensex and the Nifty slumped sharply on the back of profit-booking in the key large-cap stocks. With continued concern over US-China trade talks and geopolitical tensions, investors should remain cautious in the ensuing week. The crude oil movement and the weakening of the rupee need to be watched.

Nifty 50 (11,278.9)

Last week, the Nifty index began to decline, triggered by negative global cues and profit-taking. The index plummeted 433 points or 3.7 per cent. After testing a key resistance in the 11,700-11,750 band recently, the index commenced to decline, prompted by negative divergence in the daily RSI and price rate of change indicator. The index subsequently breached the key supports at 11,600 and 11,500 levels. Currently, it tests support at 11,300.

A failure to reverse higher and move beyond 11,500 will keep the selling pressure intact. A decisive downward break of 11,300 can drag the index down to the key support placed in the 11,000-11,100 band. Investors should avoid taking fresh long positions at this juncture. A strong plunge below 11,000 will mar the short-term uptrend and drag the index lower to 10,800 levels. The next supports are at 10,600 and 10,400 levels, which can provide a base thereafter.

On the other hand, a strong break-out of the resistance at 11,750 is needed to bring back bullish momentum and take the index higher to 11,850 and 11,900 in short term. A further rally above 11,900 will accelerate the index northwards to 12,000, which is a psychological level.

Medium-term trend: The medium-term uptrend is currently under threat after a steep 3.7 per cent tumble last week. The index can find support in the band between 11,600 and 11,700. But a strong downward break of this zone will alter the uptrend and drag the index lower to 10,400 and 10,000 levels over the medium term. Conversely, a break above the 11,700-11,750 band will underpin the uptrend and take the index higher to 11,900 and 12,000 levels in the medium term.

Sensex (37,462.9)

The Sensex tumbled 1,500 points or 3.8 per cent, breaking below the key base level of 38,000. The significant resistance at 39,000 had capped the upside in April and the index began to decline thereafter breaking the key supports. The near-term trend is down. The index trades well below the 21- and 50-day moving averages. The daily relative strength index hovers in the bearish zone. Also, the daily price rate of change indicator hovers in the negative terrain, implying selling interest.

The index now tests support at 37,500. A strong fall below this level in the initial part of the week can pull the index down to 37,000. However, as long as the index trades above the key base level of 36,500, the short-term uptrend will remain intact. A further fall below 36,500 will alter the uptrend and drag the index lower to 36,000. The support in the band between 35,600 and 36,000 is a crucial medium-term support to watch. On the upside, the index needs to move beyond 38,000 for a corrective up-move to occur. Such a move can take the index higher to 38,400 and 38,800.

The significant resistance in the 38,800 and 39,000 band will continue to act as a vital barrier; only a strong break above this zone will reinforce the uptrend. The next resistances are at 39,400 and 39,800.

The medium-term uptrend will remain intact as the index trades above 35,800. Investors with a medium-term view can stay invested with a stop-loss at 36,400 levels.

Nifty Bank (29,040.5)

The Nifty Bank index also tumbled last week, down by 913 points or 3 per cent. It breached the sideways range of 29,500 and 30,500 on the downside. The index currently tests the next key support at 29,000. A downward breakthrough of this base will reinforce the bearish momentum and drag the index down to 28,500 levels. A fall below this level will mitigate the short-term uptrend and pull the Nifty Bank index down to 28,000 and 27,500 in the ensuing weeks. Traders with a short-term perspective can consider taking short positions on a decisive fall below 29,000 with a fixed stop-loss.

Conversely, if the index manages to break above the immediate resistance at 29,500, there could be a corrective up-move to 30,000 in the near term. To strengthen the short-term uptrend, the index needs to conclusively move beyond 30,000. The next key resistances are at 30,500 and 31,000.

Global cues

Last week, the Dow Jones Industrial Average slumped 562 points, or 2 per cent, to close at 25,942 amid volatility. The index tests support at 26,000. A decisive fall below this base can drag the index down to 25,500 once again. A further decline under 25,500 can pull the index lower to 25,000. But a strong break above 26,500 is needed to strength the bullish momentum and take the index higher to 26,750 and 27,000.

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Published on May 11, 2019
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