Technical Analysis

Index outlook: Like a cat on a hot tin roof

Lokeshwarri SK | Updated on November 25, 2017 Published on November 08, 2014

The Sensex and the Nifty moved in a narrow range last week. Investors appear edgy with the indices hitting record highs

The Sensex and the Nifty wavered in a narrow band last week. While there was a ripple of excitement when the Sensex crossed the 28,000 milestone, market movement last week largely signals ambivalence. Investors should brace themselves for a sharp move in either direction.

With the hiatus in the blue-chip rally, trading interest shifted to small and mid-cap stocks.

The silver lining for the market at the current juncture is the decline in crude prices. With the government making the most of this opportunity by de-regulating diesel prices, fiscal deficit numbers are going to improve. The current account deficit and inflation will also look better due to the lower price of imported crude oil.

The focus is also shifting to the RBI monetary policy scheduled for early December. The call to bring down policy rates is growing louder as inflation continues on its downward path.

The industrial production numbers for September and consumer price inflation for October, slated for release this week, will therefore be of great interest. Further slowdown in growth will apply pressure on the central bank to bring down rates sooner. Global market also appeared to have lost steam.

Many benchmarks reversed sharply lower last week, with growing concerns on slowing Europe and China.

Interestingly, the US market appears to be on a different trip. The Dow and the S&P 500 recorded fresh lifetime highs.

Rather tepid growth in employment numbers in the US has assuaged market fears about the Federal Reserve speeding towards normalcy and higher rates. Reassurance from the ECB and the Fed chair — that the unconventional monetary policy stance will remain if economies continue to falter — also made investors happier.

Foreign portfolio investors are still buying in Indian markets. Volumes in the cash segment picked up towards the weekend while derivative volumes were lacklustre. Open interest on the NSE’s derivative segment is above ₹200,000 crore, reflecting elevated trading interest.

Momentum indicators in the daily chart of the Sensex continue to stay perky. But the slowdown in the weekly indicators is a point of concern.

These indicators are sloping lower since last July. The negative divergence means the rally could halt and a medium-term correction could be around the corner.

Sensex (27,868.6)

The Sensex moved sideways with three small-bodied formations last week. This indicates a pause in the up-trend.

The week ahead: The outlook has not changed much since last week. The index has immediate target at 28,032. There is likely to be a heavy resistance around the 28,000 level. If it is crossed, the Sensex can head to 28,353 or 28,527. The rally could terminate at either of these levels if there is a short-term spurt early next week.

Supports that need to be watched are at 27,354 and 27,000 and 26,806 (50-day moving average)

Medium-term trend: As mentioned last week, the index is near critical medium resistance zone. The movement over the next couple of weeks will help us determine the medium-term trend in the index.

Medium-term target on a sharp break above 28,500 is 29,694. We retain the key medium-term supports at 25,000 and 24,500.

Nifty (8,337.00)

The Nifty closed with a doji formation on the weekly chart. This can either be a consolidation in an uptrend or the end of the rally from October 17.

The week ahead: In other words, the index can move in either direction in the short term. If the index moves past 8,400, it can rise to 8,437 or 8,529. Critical support that traders need to look out for is at 8,180. Close below this level will imply that the short-term trend is under threat. Next supports are at 8,128 and 8,013.

Medium-term trend: There is no alteration in our medium-term view. There is resistance in the zone between 8,400 and 8,450. If the Nifty manages to move past 8,450, it can then move to 8,892.

Key medium-term support stays at 7,300.

Global cues

The short-term rally that started in mid-October halted last week. US investors, however, continued to be gung-ho.

The CBOE volatility index declined further to close at 13.1 last week, implying continued complacence among US investors.

The Dow Jones Industrial Average rose to a new record high and closed 183 points higher. We retain the immediate target for the Dow at 18,486. But investors need to watch out for the support at 17,000. The index needs to close below this level in order to signal a reversal in the short-term trend.

Most Asian indices, such as the Jakarta Composite, KLSE Composite and the Hang Seng, closed sharply lower last week, signalling the end of the short-term trend that began in October.

The dollar index continued its spectacular surge last week, rising to a four-year high.

As mentioned earlier, the index has strong resistance in the 89-90 band. If this region is breached, the next resistance is at 92.

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