Technical Analysis

Index Outlook: The Sensex and Nifty can extend their rally

Yoganand D | Updated on September 22, 2019 Published on September 21, 2019

The key benchmark indices gained sharply last week, breaking important hurdles

The Sensex and the Nifty commenced the past week on a weak note and continued to decline. But the indices did a volte-face and zoomed more than 5 per cent on Friday, triggered by the Finance Minister’s announcement of a sharp cut in corporate tax rate and the roll-back of the increase in surcharge on capital gains from the sale of listed shares.

The Nifty Auto and the Nifty Bank indices were the top gainers on Friday’s session, rallying 9.9 per cent and 8.3 per cent, respectively. Investor focus will now shift to the upcoming RBI policy meeting scheduled for early October.

The global markets were choppy last week as the US Federal Reserve cut interest rates, but gave mixed signals on its next move. The US and China resumed talks for the first time in almost two months. This, coupled with global crude oil price movement, will be in focus in the coming week.

Nifty 50 (11,274.2)

The unprecedented rally of 569 points, or 5.3 per cent, accompanied by extraordinary volume on Friday, led the Nifty to end the week on a positive note, gaining 198 points or 1.8 per cent.

After an initial decline in the past week, the index took support in the 10,700-10,800 band, before sky-rocketing. The recent rally has decisively breached the upper boundary of the sideways consolidation phase between 10,700 and 11,200. The index also managed to close above the 200-day moving average. With the recent gains, the index appears to have reversed direction, triggered by a prolonged positive divergence in the daily moving average convergence divergence indicator.

The short-term trend has turned bullish. The daily relative strength index (RSI) is on the brink of entering the bullish zone from the neutral region and the weekly RSI continues to hover in the neutral region with an upward bias. Besides, the daily price rate of change indicator features in the positive terrain, implying buying interest. The Nifty now faces key resistances ahead at 11,400 and 11,500. A strong break above 11,500 will reinforce the bullish momentum and take the index higher to 11,700 levels.

On the other hand, if any correction is witnessed or the index fails to move beyond the 11,400 levels, key supports at 11,200 and 11,100 can provide base. A further slump below 11,100 can find supports at 11,000 and 10,800.

 

 

 

Medium-term trend: The medium-term downtrend, which has been in place since registering a new high at 12,103 in early June, appears to be coming to an end after the recent strong rally. The index has a significant trend-deciding level at 11,500. An emphatic break above this barrier will alter the downtrend and take the index northwards to the subsequent resistances at 11,700 and 11,800 in the medium term. A key medium-term resistance above 11,800 is placed at 12,000, which is a psychological level.

On the downside, a fall below 11,000 can drag the index down to 10,700. A conclusive plunge below this level can drag it to the next supports at 10,600, 10,400 and 10,100 over the medium term.

Sensex (38,014.6)

The Sensex sky-rocketed 1,921 points or 5.3 per cent with extraordinary volume on Friday. This rally has decisively breached a key barrier as well as the 200-day moving average at 37,500. The index has advanced 629 points or 1.7 per cent for the week. However, it tests a key resistance at the 38,000 mark.

A decisive rally above this level will strengthen the near-term uptrend and take the index higher to 38,400 and 38,600 in the coming weeks. A strong breakthrough of 38,600 will alter the medium-term downtrend that has been in place from the June high of 40,312. It can pave way for a rally to test resistance at 39,000 in the medium term. Key resistances beyond 39,000 are at 39,400 and 40,000 levels.

Conversely, if the index witnesses a pause or a corrective decline, it can find support at 37,500 and 37,000. Subsequent vital supports are placed at 36,600, 36,400 and 36,000 levels. Investors with a medium-term perspective can continue to stay invested with a stop-loss at 36,400.

Nifty Bank (28,981.5)

On Friday, the Nifty Bank shot up by gaining 2,223 points or 8.3 per cent, outpacing the benchmark indices, and breached key resistances at 28,000 and 28,500 levels. The index ended the week by advancing 882 points or 3 per cent. The daily RSI is likely to enter the bullish zone from the neutral region and the weekly RSI hovers in the neutral region. Further, the daily price rate of change indicator hovers in the positive terrain, implying buying interest.

After a sharp rally, the index tests a significant resistance at 29,000. A strong break-out of this level will strengthen the near-term uptrend and take the index higher to 29,500. To alter the medium-term downtrend that has been in place since June this year, a strong rally beyond the key resistance at 30,000 is needed. In such a scenario, the index can extend the uptrend to 30,500 and 31,000 over the medium term.

A near-term profit booking can see a corrective decline in the index. It can slip to 28,500 or to 28,000 before an uptrend resumes. Significant supports below 28,000 are pegged at 27,500 and 27,000.

Alternatively, a slump below the immediate support level of 27,500 can bring back bearishness and drag the index down to 27,000 and 26,500 levels. Traders with a short-term perspective can make use of the corrective declines to buy with a stop-loss at 28,400. Consider booking profit if the index reaches 30,000.

Global cues

The Dow Jones Industrial Average began to decline last week, testing a key medium-term resistance at 27,300, and has dropped 284 points, or 1 per cent, to close at 26,935. A conclusive rally above 27,300 can take the index higher to 27,500. On the downside, a slump below 26,800 can drag the index down to 26,600 and then to 26,400.

The Nikkei 225 tests resistance at 22,000, and closed the week marginally on a positive note at 22,079 levels. A decisive break above this level can take it higher to 22,260 and then to 22,500. Supports to watch are at 21,700 and 21,500.

 

 

Published on September 21, 2019
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