Index Outlook. Budget can provide clear direction

The domestic benchmark indices — the Sensex and the Nifty 50 — began the week on a positive note, but failed to sustain momentum.

The indices did a volte-face due to disappointing quarterly results of key blue-chip stocks such as ITC and Maruti. Investors should maintain a cautious approach this week and watch out for key events, locally and globally.

The European Central Bank kept interest rates unchanged amid rising concern over the region’s growth outlook. The US Fed’s first policy meeting, scheduled on January 29-30, needs a close watch as the outcome could impact the movement of crude oil and gold prices.

On the domestic front, the third quarter earnings of some key banking stocks, January month derivatives expiry and the Interim Budget 2019 on February 1 can set the market direction from a medium-term perspective. Investors should, thus, tread with caution.

Nifty 50 (10,780.5)

Last week, the Nifty 50 failed to carry forward the buying interest witnessed the week earlier as the index failed to surpass the key resistance level of 11,000 and made a U-turn.

Witnessing selling pressure at higher levels, it declined 126 points or 1.2 per cent last week. On Friday, it fell 0.6 per cent, breaching its 200-day moving average.

The index has formed a bearish engulfing candlestick pattern on the weekly chart. This is a reversal candlestick pattern, indicating the possibility of a trend reversal.

The daily relative strength index has begun to chart downwards after hitting the 60-level in the previous week. The weekly RSI continues to hover in the neutral region. The daily price rate of change indicator has just entered the negative territory, implying selling interest and the weekly counterpart is on the brink of entering the negative terrain from the positive region.

A decisive fall below the key immediate support at 10,700 and a negative weekly close will confirm the trend reversal.

In that case, the index can continue the on-going down-move and test the key base in the 10,400-10,500 zone. The formation of a rising wedge is a bearish reversal pattern.

A decisive plunge below 10,700 will confirm the break-out of the pattern and the index will continue to trend downwards. Traders with a short-term view should avoid taking long positions now.

The sideways consolidation phase that has been in place since early November 2018 in the 10,400-11,000 band will remain in place as long as the index trades above 10,400.

But an emphatic fall below the vital base level of 10,400 can strengthen the bearish momentum and confirm the rising wedge pattern which, in turn, can drag the index down to the next support levels at 10,300 and 10,100-10,000 band.

On the other hand, the index continues to face difficulty in breaching the psychological barrier at 11,000. A conclusive break above this level and the key trend-deciding level of 11,100 is required to reinforce the short-term uptrend that began in October 2018. The next targets are 11,300 and 11,500.

Medium-term trend: The medium-term trend continues to be down since the August 2018 peak of 11,760. This downtrend will remain in place as long as the index trades below the key trend-deciding level of 11,100.

Only a decisive break above 11,100 will reinforce the bullish momentum and take the index higher to 11,300 and 11,500.

Conversely, a plunge below the key support level of 10,400 will alter the sideways trend and pull the index lower to 10,000 levels. Next key supports are placed at 9,900, 9,700 and 9,500 levels.

Sensex (36,025.5)

Similar to Nifty index, a rising wedge pattern has been visible in the Sensex since late October 2018.

The pattern began with a wide base and later narrowed , as the index moved up to 36,550 from December. A decisive fall below the im

mediate support level of 35,800 will confirm the pattern and drag the index lower to 35,400 and 35,000 levels. Last week, the Sensex fell 361 points or 1 per cent, forming a bearish engulfing candlestick pattern in the weekly chart. This also a bearish trend reversal candlestick pattern that has negative implication. Another negative weekly close will confirm the pattern and drag the index downwards.

The index has been on a sideways consolidation phase in the 34,600-36,600 band since last November.

A strong plunge below the vital base at 35,000 will underpin the medium-term downtrend that has been in place since the August 2018 peak of 38,989.

Thereafter, it can trend down to 34,600 in the medium term. Next key supports are pegged at at 34,400 and 34,000.

After testing a significant resistance at 36,600, the index began to decline recently. A conclusive break above this barrier is required to reinforce the bullish momentum and take the index higher to 37,000 and 37,400.

Nifty Bank (27,115.3)

The Nifty Bank slumped 341 points or 12 per cent in the previous week and formed a bearish engulfing candlestick pattern.

A fall below the immediate support at 27,000 can drag the index down to 26,700 and 26,500. In that case, traders can consider going short on a strong fall below 27,000 with a fixed stop-loss.

The medium-term uptrend that began in October 2018 is weakening, as the index faces difficulty in advancing above the key resistance at 27,500. A further fall below 26,500 can drag the index to 26,000.

But the medium-term uptrend will remain intact as long as the index trades above the key base in the 25,800-26,000 band.

On the other hand, conclusive break above 27,500 is needed to strength the uptrend and take the index higher to 27,700 and 28,000 in the short term.

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