Index Outlook: Nifty shows early signs of weakness

It was another monotonous week for the equity benchmark indices, the Sensex and the Nifty, as they moved in a sideways range. However, this time, the bias is negative as the significant resistances remain resilient, and there are initial signs of weakness.

Therefore, investors with a short-term perspective need to be watchful in the ensuing derivatives expiry week. Both the mid- and small-cap indices were also choppy in the past week and continue to show signs of weakness.

On the global front, the progress of the US-China trade deal talks needs to be observed along with the crude oil movement.

Nifty 50 (11,914.4)

Three weeks in a row, the Nifty has been choppy, testing the key resistance at 12,000, and keeping the near-term view ambiguous. The index climbed 18 points, or 0.16 per cent, last week. Testing the crucial medium-term resistance at the 12,000 mark, the index has formed a gravestone doji candlestick pattern in the weekly chart, which is seen as a bearish reversal pattern. Hence, a decisive fall below the key immediate support level of 11,800 can imply near-term trend reversal and drag the index lower to 11,700 in the coming weeks. Also, the daily relative strength index (RSI) has entered the neutral region from the bullish zone; this indicates weakening of the up-move.

The daily price rate of change indicator has entered the negative terrain after displaying a negative divergence recently, depicting selling interest. A further decline below 11,700 will start threatening the short-term uptrend that has been in place since early October.

Subsequent supports at 11,550 and 11,440 can provide base. A strong fall below the trend-deciding level of 11,500 is needed to mar the uptrend. In that scenario, the key supports to note are at 11,350 and 11,200 levels.

Conversely, if the index manages to conclusively break above the 12,000 mark, it will strengthen the up-move and take it higher to 12,100 and then to 12,200 levels in the near term.

Medium-term trend: Though the medium-term trend has been up since the index reversed higher from the September low of 10,670, it is showing some weariness after another volatile week. We restate that an emphatic break above the crucial medium-term resistance in the 12,000-12,100 band can push the Nifty northwards to 12,300 and 12,500 over the medium term. That said, if the index slumps below the significant medium-term support at 11,500, it will weaken the uptrend, and can decline further to test the key trend-deciding level at 11,200.

The medium-term support below 11,200 is placed at 11,000, below which are the 10,800 and 10,700 levels. Investors with medium-term perspective can stay invested with a stop-loss at 11,200.

Sensex (40,359.4)

Last week also, the Sensex was volatile and ended on a flat note. It has been moving sideways in the band between 40,000 and 40,750 over the past three weeks, but with a negative bias. After registering a new high at 40,816 on Wednesday, it began to decline.

In the weekly chart, it has formed a shooting star candlestick pattern, a bearish reversal pattern that implies trend-reversal. The negative divergence in the daily RSI and price rate of change indicator also indicates trend reversal.

A strong decline below the immediate support level of 40,000 will diminish bullish momentum and drag the index lower to 39,500 levels with a minor halt at 39,750 levels. The next support below 39,500 is at 39,000. The medium-term uptrend will be under threat if the index declines below the vital base level of 38,500. Such a decline can pull the index lower to the next support levels at 38,000 and 37,500 over the medium term.

On the upside, a decisive break above the immediate resistance level of 40,750 can take the index higher to 40,900 and then to 41,000 in the short term.

Nifty Bank (31,111.6)

The Nifty Bank gave away its initial gains and closed the week by marginally advancing 103 points or 0.33 per cent despite choppiness. The index faced key medium-term resistance at 31,500 and started to decline recently.

The daily RSI displays negative divergence, indicating that near-term trend-reversal is in the offing. Moreover, the daily price rate of change indicator continues to show negative divergence, indicating weakness and trend reversal.

A decisive fall below the immediate support level of 31,000 can pull the index lower to 30,500 and then to 30,000 in the short term. A strong fall below 30,000 will be a threat to the short-term uptrend and drag the index lower to the following key supports at 29,500 and 29,000.

Traders should tread with caution and consider initiating fresh short positions on a strong fall below 31,000 with a fixed stop-loss. Conversely, an emphatic breakthrough of 31,500 can push the index northwards to 31,750 and 32,000 levels.

Global cues

The Dow Jones Industrial Average was choppy and snapped its four-week winning streak. It fell 129 points, or 0.46 per cent, to close the week at 27,875.6. The index tests a key resistance at 28,000. A strong rally above this barrier can take it higher to 28,250 and then to 28,500 in the coming weeks. The immediate support is at 27,800; a decisive fall below this base can drag the index lower to 27,400 and then to 27,000 in the short term.

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