Technical Analysis

A pause in the rally

Yoganand D | Updated on September 08, 2018 Published on September 08, 2018

The indices retreated due to selling pressure and profit-taking. Will the fall continue?

Following a sluggish start, the Sensex and the Nifty witnessed a sharp fall due to trade worries and weak Chinese data. Most of the global markets ended the week on a negative note on trade war fears and rate hike worries. In the coming truncated week, the focus will be on macroeconomic data such as CPI and WPI which are due for release. Also, rising crude oil price and weakening rupee should be closely watched. Investors can consider taking some profits off the table if the domestic benchmark indices struggle to find fresh momentum.

Nifty (11,589.1)

After an initial three days of decline, the index marked an intra-week low at 11,393 and bounced back, recovering some of the loss during the latter part of the week. However, the Nifty 50 index ended the week on a negative note, declining 91 points or 0.78 per cent.

Short-term trend: The short-term uptrend has been in place since the support at around 10,550 in June. But with the recent sharp fall, the uptrend is losing momentum and the index also shows signs of trend reversal. Snapping the six consecutive weekly positive closes, the index formed a bearish engulfing candlestick pattern in the weekly chart, which is a bearish reversal pattern.

Moreover, the index had recently tested the upper boundary of the Bollinger Bands and began to correct from the overbought territory. Currently, the index tests the key support as well as a 21-day moving average at around 11,500. A decisive fall below this will indicate a negative shift and the index can decline to 11,400 and 11,300 in the short term. In that scenario, traders can consider taking partial profits off the table. The daily indicators such as the relative strength index and price rate change are broadly charting downwards.

As long as the index trades above the support level of 11,300, there will not be any major threat to the short-term uptrend. The down-move will be a corrective move. That said, a strong plunge below 11,300 can start weakening the uptrend and drag the index lower to the next crucial base level in the 11,150-11,200 band, which is key trend-deciding zone. Subsequent supports below 11,150 are placed at 10,850 and 10,700. Traders with a short-term horizon can hold the long positions with a stop-loss at 11,300 levels.

There was strong intra-day recovery over the last two sessions, though it gave some relief to the steep fall. But a decisive break-out of the immediate resistance in the 11,700-11,750 bands is required to strengthen the uptrend. A conclusive up-move above 11,750 can take the index higher to 11,887 and 11,950 in the short term.

Medium-term trend: The sharp fall can start a corrective decline with a medium-term uptrend. Since the March 2018 low of 9,951, the Nifty index has been in a medium-term uptrend. A strong rally above 11,750 can push the index up to 11,887 and 12,000 in the medium term. Conversely, a decisive fall below the vital medium-term support band between 11,000 and 11,100 will start threatening the uptrend. Next supports are at 10,800 and 10,600.


Sensex (38,389.8)

The Sensex fell 225 points or 0.66 per cent in the previous week after snapping the six consecutive week gain. The index slipped below the key support level of 38,000 during the intra-week but managed to bounce and close above this level. Formation of a bearish engulfing candlestick pattern in the weekly chart indicates short-term trend reversal.

A decisive fall below the immediate support level of 38,000 will confirm the trend reversal and drag the index to 37,600 and 37,200 levels. The daily relative strength index as well as price rate of change indicators are trending down, in line with the down-move. Moreover, their weekly counterparts are correcting from the overbought territory.

Near-term resistances are placed at 38,700 and 39,000. A definite break above 39,000 is needed to underpin the bullish momentum and accelerate the index up to 39,500 and 40,000 in the short to medium term. Failure to climb beyond 39,000 can keep the index range-bound between 38,000 and 39,000 for a while. Key supports below 37,200 are at 36,600 and 36,500 levels.

Nifty Bank (27481.4)

Under-performing the bellwether indices, the Bank Nifty plummeted 580 points or 2 per cent last week. The fall has decisively breached its 21-day moving average and key support at 27,750 levels. The index has ended its narrow range-bound movement at 27,750 and 28,350 and began to decline. However, it now tests a medium-term support at 27,500. A strong slump below this base will pull the index lower to 27,000 in the ensuing weeks.

The index has also formed a bearish engulfing candlestick pattern in the weekly chart, indicating a short-term trend reversal. A decisive plunge below 27,000 will confirm the trend reversal and pull the index lower to 26,750 and 26,500. Further fall below 26,500 can drag the index down to the next supports at 26,250 and 26,000.

Traders with a short-term perspective can consider taking short positions on a decisive plunge below 27,500 levels with a fixed stop-loss at 27,650 levels. On the other hand, a conclusive break above the significant resistance at 28,000 is required to strengthen the short-term uptrend and take the index higher to 28,500. Next medium-term resistance above 28,500 is at 29,000.

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