Technical Analysis

Index Outlook: Nifty can be range-bound this year

Lokeshwarri SK | Updated on July 27, 2019

The trend in the Nifty and the Sensex is down. But the 200-DMA will provide support

A lot of water has flown under the bridge since the yearly index outlook for 2019, published on December 29, 2018.

The much-awaited Lok Sabha elections are over and we have the Modi-led NDA government once more in the saddle, far more empowered than before. Stock price movement in the first half of 2019 has mostly been driven by this event.

In the yearly outlook, the medium-term trend was not very clear. So we had outlined two scenarios — one, the bearish scenario was to unfold if the Nifty and the Sensex failed to surpass 11,150 and 36,800 respectively. In this case, the decline to 8,200 in Nifty and 27,200 in the Sensex would have been possible.

Two, the bullish scenario was to evolve if the benchmarks moved beyond 11,150 and 36,800. In this case, a move to the previous peak of 11,750 and a subsequent range-bound-move between 10,000 and 12,000 was expected in the Nifty. Upper targets for the Sensex were given at 38,930 and 41,500.

Global conditions have improved vastly since the beginning of this year. While global stock markets were threatening to go into a deep correction then, on fears of an impending global recession, this threat appears to have waned, with central banks, including the Fed, going slow on monetary tightening. Reduction in the intensity of the trade-war rhetoric has also helped.

Indian stock markets too began 2019 on a wobbly note. But there has been a smart rally since March, spurred by foreign portfolio investors buying in anticipation of a Modi win in the general elections.

The Nifty and the Sensex were able to breach their key resistances by March and hit their life time peaks of 12,103 and 40,312 by the first week of June.

But the stock market has lost steam since then, with a medium-term correction currently in force. This ties up with the second scenario outlined in our yearly outlook.

The stage appears set for a broad sideways move in the Nifty and the Sensex over the rest of the year. There is, however, a possibility of the indices declining further from the current levels in the near term, before they find a floor.

This ties with the market fundamentals as well. Investors seem to have turned circumspect, with the Nifty and the Sensex hitting the psychologically significant levels of 12,000 and 40,000 respectively.

Also, with earnings growth being lacklustre, consumption getting effected due to NBFC crisis, investment spends on the slow lane and economic growth too threatening to slow down, there are few triggers for stock prices to move up.

The valuation of the Sensex and the Nifty at trailing PE of 27, also make further rally difficult. These factors have made the path of least resistance point southwards.

Medium-term outlook

The movement of the Nifty and the Sensex since the beginning of 2019 implies that the impulse wave from August 2013 low is still in motion.

The fourth wave of this impulse wave could develop into an irregular flat or a triangle. This means the current down-move from the 12,103 peak in the Nifty can drag the index to 11,032 or 10,372.

The area between 11,100 and 11,200 is critical for the Nifty and can provide strong support. Presence of the 200-DMA and an important trough in that region make it a critical level. Break of that level can, however, intensify the selling pressure. A strong close above 11,700 is required to make the medium-term view positive again.

Medium-term targets for the Sensex, if the slide continues, are 36,203 and 33,664. The sideways range that is likely to restrict the Sensex for the rest of this year is between 33,000 and 41,000. The crucial medium-term support zone for the Sensex is between 37,000 and 37,250.

The week ahead

The Nifty is nearing an important support. So watch out for sudden reversal. Indicators are also hinting at a pause. Immediate supports are at 11,189 and 11,108.

Upper targets on a bounce are 11,400 and 11,560. Inability to move above 11,560 will be the cue to initiate fresh shorts.

Supports for the Sensex are at 37,256 and 36,956. Short-term trend will reverse higher only on a close above 38,500.

The Bank Nifty is also trying to reverse higher. Immediate targets are 29,510 and 30,000. Inability to move above 30,000 will be a sign of weakness and cue for initiating fresh short. But move above 30,000 can take the index to 30,300 or 30,600.

Key support for the week is at 28,525. Close below this level will take the index lower to 28,133, which is a medium-term trend decider.

Global cues

Most global benchmarks such as Brazil’s Bovespa and the Dow Jones Industrial Average did an about-turn in the beginning of 2019 and going on to record fresh highs.

The Dow has surpassed its previous peak at 26,951 and is hovering just above this level.

Unless there is a strong close below this peak, the medium-term trend in the index will remain up.

The CBOE Volatility index that was threatening to move above 35 in December has since then moved lower and trades between 12 and 15 over the last two months.

This implies that the mood in global markets is sanguine.

Surprisingly, some of the emerging markets have not fared too well this calendar.

While Jakarta Composite is trading higher, Malaysia’s benchmark KLSE Composite, Mexico’s IPC and Korea’s Seoul Composite are trading well below their 2018 peaks.

Published on July 27, 2019

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