Technical Analysis

Index Outlook | Where is the floor for Sensex, Nifty 50?

Lokeshwarri SK | Updated on March 02, 2020 Published on February 29, 2020

The indices are close to critical medium-term supports; it needs to be seen if these levels hold

It was absolute pandemonium across financial markets last week as fear about the rapidly spreading COVID-19 virus caused a wave of sell-off across global markets.

The selling onslaught was too powerful for bulls, who stampeded towards the exit door.

The 7 per cent decline in the Sensex and the Nifty, however, appear fairly benign compared with the 12 per cent cut in the Dow Jones Industrial Average and the S&P 500, or the 16 per cent crash in crude oil prices last week.

Last Thursday’s 4.4 per cent rout in the Dow Jones Industrial Average was its worst drop, in points term, in history. The fear gauge, the CBOE VIX, shot up to levels last seen in February 2018, close to 50. Safe havens weren’t spared either, with the dollar index losing 1 per cent and gold declining 4 per cent.

 

The widespread selling in all markets is worrying, as it implies that traders who were taking positions with borrowed money, or leveraged trading, are having to sell their profitable positions to square the loss-making positions. The Sensex and the Nifty 50 have now lost close to 10 per cent from the January 2020 peaks.

 

 

If we look at the up-move from 2016, the declines in the indices have barely exceeded 15 per cent.

The last time the two benchmarks declined more than 20 per cent from their peaks was in 2015. The bulls thus have another chance this time to pull the indices higher this week, and if that happens, we will be moving in the range explained below.

In other words, the action this week will help determine if the move from the 2016 low has ended or the long-term uptrend will extend further.

Hope for a pull-back also arises from the fact that the Dow is halting at the 61.8 per cent retracement of the up-move from June 2019, and formed a bullish hammer pattern last Friday.

The index can attempt to claw back some ground this week.

Nifty 50 (11,201.7)

The Nifty 50 not only formed a large downward last Friday, but also closed firmly below the 200-day moving average (DMA), posing a serious threat to the medium-term uptrend.

The week ahead: Momentum oscillators have deteriorated to levels last seen in 2018.

But the good news is that the daily oscillators are in the over-sold zone. There could be some attempt at moving higher this week. The Nifty 50 will face resistance at 11,382 and 11,536, if it attempts to move higher.

If the index reverses or fails to move above 11,536 this week, it will be a signal that there could be further decline.

A move above 11,536 can take the index to 11,700 and 11,840.

The Nifty 50 has to move beyond 11,840 to reverse the medium-term down-trend.

If the index continues its decline, the next supports for the week will be between 11,000 and 11,100. If this range is breached, the index will head towards 10,670.

Medium-term trend: Our forecast in the beginning of the year of a 10 per cent decline from the peak, after a little extension, was fulfilled last week. But what next?

We had written last week that a decline below 11,800 can drag the index to 11,000. That seems to be on the way to getting fulfilled.

But there is a strong support zone between 11,000 and 11,200. This is due to the medium-term trend-line support and the 61.8 per cent retracement of the rally from the September 2019 lows.

In other words, the positive long-term scenario of a range-bound move between 11,000 and 13,000 for this year remains, if the Nifty 50 manages to hold the 11,000 level for the next couple of weeks and moves higher.

But a move below 11,000 can signal the completion of the move from March 2016. The initial downward targets for the Nifty 50 in this case are 10,637 and 10,300. The long-term uptrend will be under threat only on a close below 10,300.

Sensex (38,297.3)

The Sensex, too, is pausing at a very important support level from a medium-term perspective.

It has strong support in the 38,300 and 38,500 zone where the medium-term trend line as well an important Fibonacci retracement lie.

A rebound from here will, however, face resistance at 39,087, 39,423 and 40,400. The short-term trend will turn positive only on a close above 40,400.

An inability to move above 39,423 will mean that the index can decline to 38,000, 37,415 or 35,987.

Published on February 29, 2020
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