Technical Analysis

Why key indices are set to fall further

Yoganand D | Updated on February 28, 2021

Sensex, Nifty 50 have witnessed sharp decline

The week ago was a volatile week in which the indices witnessed wild swings due to technical glitch on NSE, February month derivatives expiry and US market’s erratic movement. After an initial decline, the key benchmark indices — the Sensex and the Nifty 50 witnessed a strong rally last Wednesday and Thursday but that eventually got evaporated on Friday. The week ahead is crucial for the indices and is likely to take cues from the global markets. Key things to watch are February month auto sales numbers, weakening rupee and crude oil price momentum apart from the global markets.

 

Nifty 50 (14,529.1)

Amid volatility, the Nifty 50 index tested the key resistance level of 15,000 and tumbled 452 points or 3 per cent the past week as the investors or traders continue to book profit and subsequently witnessed selling interest at higher levels. The psychological level of 15,000 will continue to act as a significant hurdle for a while.

The week ahead: Recently, the Nifty 50 index moved beyond the psychological barrier of 15,000 and recorded a new high of 15,431 in mid-February. However, the index failed to sustain above this crucial level and it began to decline triggered by negative divergence in the weekly relative strength index. The daily RSI is moving lower in the neutral region and the weekly RSI is retreating from the overbought territory. Over the past two weeks the index has been in a near-term decline. The up-move that took support in the 13,500-13,600 range in late January this year is under threat now. On Friday, the index plunged 3.7 per cent breaking below the key immediate base level of 14,750 as well as the 21-day moving average line. It now tests support at 14,500 and poised just above the 50-day moving average. An emphatic fall below this base will strengthen the on-going down-move and can pull the index lower to 14,280 initially and then to 14,000 levels. A clear fall below the 14,000-mark can drag the index down to the key base in the 13,500-13,600 band over the short term.

That said, a bounce from the current support or 14,280 can keep the index moving sideways in the wide range between 14,280 and 15,000 for some time. Apart from 15,000, key immediate resistances are at 14,900 and 15,200. An emphatic break above 15,200 can push the index higher to 15,300 and then to 15,500 levels over the short term.

Medium-term outlook: The medium term uptrend that commenced from the base level of 10,790 in September 2020 continues to be in place. However, a fall below the uptrend-line at around 14,280 can weaken and pull the index down to 14,000 or to 13,600 which is approximately 38 per cent Fibonacci retracement level of the prior uptrend. An empathic plunge below 13,600 can further drag the index down to 13,000-13,075 range which is a key support as well as the 50 per cent Fibonacci retracement level. As long as the index trades above the vital support level of 12,750 levels the uptrend will remain in place. The medium-term uptrend will start fading only if the index falls below this key base level. In that case the index can slump to the next support levels of 12,400, 12,260 and 12,000 over the medium term.

We reiterate that a strong rally above 15,000 levels is needed to strengthen the bullish momentum and take the index northwards to 15,500 over the medium term.

Sensex (49,099.9)

Extending the fall the Sensex plummeted 1,789 points or 3.5 per cent in the past week in the midst of choppiness. The 50,000-mark will continue to act as a key barrier for the index. A strong rally above this level is needed to strengthen the medium term uptrend and take the index northwards to 51,000 and then to 52,000 levels. Next key hurdle is at 52,500 levels.

But failure to move beyond 50,000 decisively can keep the on-going down-move intact and pull the index down to 48,600 and then to 48,000. An emphatic fall below 48,000 will mitigate the short-term uptrend that has been in place from late January from the base level of 46,000. In that case, the index can decline to 47,000 and once again test 46,000 over the short term. If the index finds support at 48,000 it can move in a sideways range between 48,000 and 50,000 for a while.

The medium-term uptrend that started from September 2020 low of 36,495 will stay in place as long as the index trades above 45,000 levels. Next supports are placed at 44,520 and 44,000. Investors with a long-term perspective can stay invested with a stop-loss at 40,000.

Nifty Bank (34,803.6)

The Nifty Bank index has declined 2.9 per cent in the past week, mainly dragged by strong tumble of 4.7 per cent on Friday. The recent fall has breached the 21-day moving average and a key support at 35,000. This has strengthened the down-move that has commenced from the high of 37,708 levels. Immediate key support is placed at 34,000 and a break below this level can drag the index down to 33,500 and 33,000 over the short term. Traders can go short with on a corrective bounce with a stop-loss at 35,300 levels. The short-term uptrend will be under threat if the index declines below 33,000 and it can decline to 32,500 and then to 32,000 in the ensuing weeks.

We restate that as long as the index trades above the key support level of 29,000, the medium-term uptrend that has been in place from the September 2020 low of 20,400 levels will remain in place. The supports below 29,000 are pegged at 28,500 and 28,000 levels.

That said, if the index finds support at 33,000 it can witness a corrective up-move to 35,000. On the upside, a decisive break above the key barrier at 36,000 is required to bring back bullishness and take the index higher to 36,500 and then to 37,000 levels once again. Next resistances are at 37,500 and 38,000 levels.

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Published on February 27, 2021
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