Will the corrective rally in Sensex and Nifty continue?

The recovery rally in the Indian benchmark indices continued for the second week. Both the Sensex and the Nifty 50 began the week on a weak note with a sharp decline of 1.65 per cent each on Monday. However, both the indices recouped their losses very well thereafter and have closed on a positive note for the week. The strong close last week leaves the chances high for a further rise from here to test their crucial resistances. As such, the steeper fall that we have been expecting will be getting delayed.

However, the trend is still down. Sensex and Nifty will have to break above their crucial resistances poised at 60,000 and 17,800 respectively to become bullish again. Only in that case will our bearish view get negated. We will have to watch closely the price action in the coming weeks.

Among the sectors, barring the BSE Health Care (down 0.11 per cent), all others ended in the green last week. The BSE Realty and BSE Metal index rose the most by 5.42 per cent and 4.69 per cent respectively.

Last week, the Reserve Bank of India (RBI) left the policy repo rate unchanged at 4 per cent. All eyes will now be on the US Federal Reserve this week. Fed Chairman Jerome Powell had already said that the central bank would discuss increasing the pace of stimulus taper in this meeting.

It will be interesting to see what the Fed has on the plate for the market, going forward.

Nifty 50 (17,511.3)

Nifty fell sharply below the psychological level of 17,000 on Monday and was threatening a steeper fall for the rest of the week. However, the index made a strong recovery from the low of 16,891.7 to close the week on a positive note at 17,511.3, up 1.83 per cent.

The week ahead: Immediate support is in the 17,400-17,380 region. As long as the index sustains above this support zone, the near-term outlook is bullish. The Nifty will have room to test 17,800 this week. We expect the Nifty to reverse lower from around 17,800 and keep intact the downtrend that has been in place since October.

Medium-term outlook: Last week we had mentioned 17,500-17,600 and 17,800 as important resistances. So, any rise to 17,800 that is expected to happen this week will not be a surprise but well within our broader view. As such, we expect the Nifty to reverse lower from around 17,800 and see a fresh fall to 17,400 initially and then 17,000-16,800 eventually. That will keep intact our broader bearish view of seeing 16,000-15,500 and even 15,000 levels in the coming months.

Nifty will have to surpass 18,000 decisively in order to invalidate the fall to 16,000-15,500 mentioned above and become strongly bullish again.

Trading strategy: Hold on to the short positions taken at an average level of 17,208. More short positions can be added at 17,750. We suggest revising the stop-loss slightly up to 17,830 from the earlier level of 17,800 as a test of 17,800 is likely. Trail the stop-loss down to 17,050 as soon as the index falls to 16,600. Move the stop-loss further down to 16,700 when the index touches 16,400. Book profits at 16,200.

Sensex (58,786.67)

The break below the 57,000-56,800 support zone earlier last week did not sustain. The Sensex had bounced back sharply from the low of 56,687.62 to close 1.89 per cent higher for the week at 58,786.67.

The week ahead : Support for this week will be in the 58,300-58,000 region. As long as the Sensex remains above 58,000, the near-term outlook is bullish. The index can break above 59,000 and rise to 59,800-60,000 in the near term. A further rise past 60,000 could be difficult and would need a strong trigger.

We expect the Sensex to reverse lower from around 60,000, going forward, and keep the broader bearish view intact. The price action around 60,000 will need a close watch.

Medium-term outlook: As mentioned last week, 59,000-60,000 is the broad resistance zone for the Sensex. A strong rise past 60,000 is needed to bring back the bullish sentiment. As long as the Sensex trades below 60,000, the downtrend that has been in place since October will remain intact. As such, the reversal from around 60,000 will keep alive the chances of the index tumbling towards 56,000-55,000 initially and then eventually to 54,000-52,000 over the medium term.

Nifty Bank (37,105.65)

The 200-Day Moving Average (currently at 35,707) continued to provide support for the Nifty Bank index last week as well. The index fell to a low of 35,697 and then bounced back sharply to close higher in the 37,000-37,200 resistance zone. The index has closed at 37,105.65, up 2.51 per cent for the week.

Supports for the coming week will be at 36,800 and 36,500. If the Nifty Bank index manages to sustain above these supports, the chances are high for it to break 37,200 this week. Such a break will then pave way for a further rise to 38,000-38,200 this week. Thereafter a fresh fall back to 36,000 is possible.

From a bigger picture, as long as the Nifty Bank index remains below 38,200, the broader bearish view of seeing a fall to 34,800-34,650 and even 34,000 will remain intact. The index has to break decisively above 38,200 to negate the bearish view.

Trading strategy: The short positions recommended at 36,678 (average entry level) two weeks back seem to be not working out well. Since we see chances of a rise to 38,000 from here, we suggest bringing down the stop-loss to 37,300 from the earlier mentioned level of 37,600. We will wait to see how the index behaves in the 38,000-38,200 region and then take fresh trades, going forward.

In case the index falls from here itself without hitting the revised stop-loss at 37,300, then follow the same strategy mentioned earlier which we reproduce here. Trail the stop-loss to 36,300 when the Nifty Bank index falls to 35,400. Move the stop-loss further lower to 35,700 as soon as the index falls to 34,700. Book profits at 34,200.

Global cues

The Dow Jones Industrial Average (35,970.99) sustained well above 34,000 and had surged over 4 per cent last week. This has eased the danger of seeing an immediate break below 34,000. Immediate support will be in the 35,500-35,250 region. While above this support zone, the Dow will have room to test 36,500-37,000 this week. The region between 36,500-37,000 is a strong resistance. A decisive rise past 37,000 is necessarily needed to become more bullish. A pull-back anywhere from the 36,500-37,000 region will have the potential to drag the Dow back to 35,000-34,000 in the coming weeks again. As such, the price action in the 36,500-37,000 region will need a close watch this week.

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