Monday, April 11, 2016

Index Outlook: Up against a strong barrier

Following a positive start on Monday, both the Nifty 50 and Sensex lost steam and witnessed a sharp fall in spite of the Reserve Bank of India (RBI) cutting repo rate by 25 basis points. Investors were purportedly expecting a larger rate cut and therefore went on a selling spree after the monetary policy announcement. The selling pressure and profit-taking dragged the indices further down to end at a three-week low. As the market is heading for a truncated week — closed on Thursday on account of Ambedkar Jayanti and on Friday for Ram Navami — traders should tread with caution. Also, the quarterly and annual results announcements of companies over the next few weeks could dictate the market sentiment.

Nifty 50 (7,555.2)

The Nifty 50 index tumbled 157.8 points or 2 per cent in the previous week. Over the past three weeks, the index moved sideways between 7,600 and 7,760 and has failed to decisively break through the key resistance in the 7,700-7,730 band.

The week ahead: The short-term uptrend in the index that started in late February is weakening. On Thursday, the index closed below the key immediate support at 7,600 as well as 21-day moving average at 7,607. Ending the week below these levels is a negative sign. Moreover, the daily rate of change indicators is displaying a negative divergence, implying that trend reversal is on the cards. However, to confirm that, the index has to conclusively fall below the key support at 7,400. Then, support at 7,300 and 7,250 will come into play. Traders with a short-term perspective can initiate short position with a stop-loss at 7,650 for the target of 7,400.

That said, a robust move above 7,610 can take the index higher to 7,700 or 7,730 once again. We reiterate that only an emphatic break above the 7,730 resistance can push the index higher to 7,800, 7,900 and then to 7,955.

Medium-term trend: The index has been on an intermediate-term downtrend from its March 2015 peak of 9,119. To alter this downtrend, a strong rally above 8,000-mark is needed. Key medium-term resistances are at 7,775 and 8,000. Supports are at 7,250 and 6,970. The short-term uptrend in the index will stay in place as long as it trades above 7,400. This will retain the positive sentiment and take the index northward to test 7,760.

Sensex (24,673.8)

Last week, the Sensex slumped 595.8 points or 2.4 per cent, moving below the key support level at 25,000. The index faced a key resistance at around 25,500 and appears to have reversed downwards. A fall below 25,000 and the 21-day moving average is a cause for concern.

The week ahead: The short-term uptrend that has been there since late February is coming under threat. As the index has fallen below the immediate support at 25,000 we can’t rule out a decline to 24,500. Next supports are at 24,000 and 23,000.

To mitigate the short-term uptrend, the Sensex needs to decisively close below 24,000. Then 23,000 and 22,500 supports will become active. On the other hand, an emphatic break-out of 25,500 is required to strengthen the bullish momentum and take the index northwards to 26,300 and 27,200. But, inability to do so can keep the index trading sideways in the band between 22,500 and 25,500.

Bank Nifty (15,568.3)

In the week ago, the Bank Nifty plummeted 606 points or 3.8 per cent. The Bank Nifty has underperformed the bellwether indices. Key resistance at 16,250 restricted the index from further rally on Monday. The index subsequently did a volte-face and began to decline.

It has conclusively breached the key supports at 16,000 and 15,800 and has closed well below them. Further, the formation of a bearish engulfing candlestick pattern in the weekly chart depicts reversal. So, the index has potential to extend its decline in the coming week and test support at 14,765 on a decisive fall below 15,500.

Further decline below 14,765 will further weaken the uptrend and drag the index lower to 14,500 and then to 14,000 in the medium term.

Therefore, traders with a short-term perspective can hold their short position and also initiate fresh short position on a fall below 15,500 with a stop-loss at 15,850. Conversely, a strong rally above 15,800 and 16,000 can take the index to 16,250.

However, to reinforce the bullish momentum, the index needs to break 16,250 decisively. Next resistances are at 16,500 and 16,800.

Global cues

Most global indices closed the week on a negative note. The Dow Jones Industrial Average declined 1.2 per cent to close at 17,576.9. It tests support at 17,500.

A strong fall below this level can drag it down to 17,000 and then to 16,700 in the short term. Key resistances to note are pegged at 17,800 and 18,000. Only a decisive rally beyond 18,000 can take the index northwards to 18,351 or even new highs.

The Nikkei 225 index extended its decline by breaching a key support at 16,000 and recorded an intra-week low at 15,471. Near-term outlook is bearish. It can retest support at 15,500 and then 15,000. Resistances are at 16,000 and 16,500 levels.

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