Technical Analysis

Will the Santa Claus rally surpass the crucial hurdle ahead?

Gurumurthy K | | Updated on: Jan 08, 2022
Stock Market Chart. 2d illustration

Stock Market Chart. 2d illustration

Key resistances coming up on the indices are likely to hold and trigger a reversal

The New Year has begun on a positive note as the Indian benchmark indices extended their Santa Claus rally very well. Both the Sensex and Nifty 50 have closed up by 2.56 per cent and 2.64 per cent respectively last week.

Among the sectors, the BSE Metal index outperformed others by surging 6.53 per cent. The BSE Oil and Gas and BSE Auto indices were up over 5 per cent each. The BSE FMCG and BSE Consumer Durables indices had closed down over 1 per cent each last week.

After selling the Indian equities for three consecutive weeks, the Foreign Portfolio Investors (FPIs) turned net buyers last week. The FPIs bought Indian equities worth $430 million last week. However, it is to be noted that the FPIs had sold $2.52 billion in December — the highest since March 2020. It is important to see if they continue to buy Indian equities in the coming weeks or will start selling again. That would also be a key driver of the Indian indices.

Nifty 50 (17,812.7)

Nifty surged breaking above the key resistance levels of 17,450 and 17,700 and made a high of 17,944.7 on Wednesday. The index gave back some of the gains and had closed at 17,812.7 on Friday, up 2.64 per cent for the week.

The week ahead: A crucial resistance for the Nifty is coming up in the 18,000-18,100 region which will need a close watch this week. A strong rise past 18,100 is needed to keep up the current bullish momentum. Such a break can take the Nifty up to 18,350 and 18,600 in the near-term. However, we expect the 18,000-18,100 resistance region to hold and cap the upside going forward. As such, we can expect the Nifty to remain below 18,100.

Support is at 17,700. A break below it can drag the Nifty down to 17,500 and further lower levels going forward. A sideways range of 17,700-18,100 is also a possibility in the near-term.

Medium-term outlook: As mentioned above, 18,000-18,100 is a crucial resistance which we expect to hold. Our overall bearish view will remain intact as long as the Nifty stays below 18,100. Significant support is at 17,500. A break below it will bring the Nifty under renewed pressure and will take it down to 17,000 initially and further lower levels eventually as we progress into 2022. For now, we will have to wait and watch how the Nifty behaves in the 18,000-18,100 resistance zone.

A sustained break above 18,100 and a subsequent rise past 18,350-18,600 will force us to review our bearish view.

Trading Strategy: The short position we had recommended earlier had got stopped out. We would now wait and watch how the Nifty behaves in the 18,000-18,100 region this week. We will recommend fresh trade positions once clarity is obtained.

Sensex (59,744.65)

Sensex surged breaking above the crucial resistance level of 60,000 and made a high of 60,332 last week. However, it failed to sustain higher and had come-off towards the end of the week. Sensex has closed at 59,744.65, up 2.56 per cent for the week.

The week ahead: Important resistance is in the broad 60,000-61,000 region which is holding well for now. We expect the upside to be capped at 61,000 from here. A rise past 61,000 looks less likely. Immediate support is at 59,500. A break below it can drag the Nifty down to 59,000 and even 58,000 in the coming days. Overall, 58,000-61,000 can be the range of trade in the near-term. A strong rise past 61,000 is necessarily needed to take the Sensex further up towards 62,000 and 63,000.

Medium-term outlook: The overall outlook will remain bearish as long as the Sensex stays below 61,000. The level of 58,000 will be an important support . A break below it will bring in fresh selling pressure on the Sensex. Such a break will then pave way for a fresh fall to 55,000 in the coming weeks. The bearish view will go wrong only if the Sensex breaks above 61,000 decisively and sustains well above it. In such a scenario, we will have to review our outlook.

Nifty Bank (37,739.6)

The Nifty Bank index witnessed a sharp rally last week surging 6.36 per cent to close at 37,739.6. However, this rally could halt and come to an end in the coming days as the index is coming closer to a crucial hurdle. Strong resistance is in the 38,350-38,500 region which is likely to cap the upside from here. A fresh fall from here will have the potential to drag the Nifty Bank index down to 36,000 in the coming weeks. Support for the index is in the 37,500-37,000 region. A break below this support zone will trigger the above mentioned fall to 36,000. It will also keep our overall bearish view intact to drag the index back to 34,000 and lower levels over the medium-term.

Traders can make use of rallies to go take fresh short positions. Enter fresh shorts for 50 per cent of the intended amount at 38,330 and accumulate another 50 per cent at 38,430. So the average entry level will be at 38,380. Keep the stop-loss at 39,200. Trail the stop-loss down to 37,900 as soon as the index moves down to 37,400. Move the stop-loss further down to 37,300 as soon as the index falls to 36,750. Book profits at 36,300.

Global cues

The Dow Jones Industrial Average began the week on a positive note, but the momentum fizzled out in the second half of the week. The Dow rose 1.7 per cent intra-week to make a high of 36,952.65 on Wednesday. However, the index had come-off sharply from this high, giving back all the gains made for the week. The index has closed at 36,231.66, down marginally by 0.29 per cent for the week. The resistance at 37,000 has held very well in line with our expectation. The pull-back towards the end of the week marks the end of the Santa Claus rally in the Dow. A further fall to 35,750-35,500 looks likely this week. A break below 35,500 can then drag the Dow down to 34,000 in the coming weeks. Broadly, the 34,000-37,000 range remains intact. Within this range, the Dow can now come down towards the lower end in the coming weeks.

Published on January 08, 2022

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