Corrective decline on the cards

The benchmark indices retreated and continue to test key resistance

Robust auto sales numbers and services growth increasing to a three-month high in April due to enhanced demand, failed to cheer the domestic markets last week. The Nifty and the Sensex began to decline following an initial rally. The corporate earnings announcements and the Karnataka State elections will be in focus the coming weeks. So traders should tread with caution.

In the recent Fed meeting, while the Federal Reserve kept its benchmark interest rate steady, it noted the overall inflation beginning to inch higher. This move was widely expected. The committee held the funds rate at a target of 1.5-1.75 per cent. The relatively dovish stance of the Fed means that it doesn't want to send a hawkish signal to investors. Subsequently, the US indices surged higher, trimming the week loss. Global events such as US inflation data, Bank of England's policy meeting and China inflation and trade balance will be in the spotlight this week.

Nifty (10,618.2)

Snapping the five weeks rally, the Nifty 50 index fell by 74 points or 0.7 per cent in the truncated past week. After testing a key resistance at 10,700, the index retreated.

Short-term trend: The short-term uptrend that has been in place from the March low at around 10,000 is now under threat as the trend begins to weaken. The index encountered a key resistance at 10,700 last week and has started to decline backed by negative divergence in the daily price rate of change indicator.

A near-term corrective decline is possible in the coming week and the index can test support at 10,550. An emphatic fall below this level can pull the index down to 10,450 levels. The daily relative strength index has re-entered the neutral region from the bullish zone and the weekly RSI continues to hover in the neutral region.

Both the daily and weekly price rate of change indicators are on the brink of entering the negative territory. A slip into the negative territory will imply selling interest and the uptrend can weaken further. Nevertheless, the mentioned supports can provide base for the corrective decline in the index. Subsequent vital support is at 10,350. Failure to take support at this level and a decisive downward break will mitigate the short-term uptrend and drag the index down to 10,250 and 10,100 levels. Next supports are at 10,000, 9,700 and 9,500 levels.

Conversely, as mentioned in this column earlier, a conclusive breakthrough of the immediate resistance at 10,700 is required to alter the downtrend which has been in place from the January peak of 11,171. Such a break above can pave way for an up move to 10,800 and 10,950 in the short term.

Medium-term trend: There are no major changes in the medium-term view. The index is at a decisive trend-deciding zone; from a positive bias of breaking it, the stance has become neutral now. We reiterate that a conclusive break-out of the immediate resistance at 10,700 can push the index northwards to 11,000 and 11,200 in the medium-term horizon. That said, if the index declines below the crucial medium-term base level of 10,400, the bearish momentum will be reactivated and drag it down to 10,200 and 10,000 levels. Subsequent medium-term supports are at 9,500 and 9,200 levels.

 

 

Sensex (34,915.3)

Amid volatility, the index has fallen marginally and formed a shooting star candlestick pattern in the weekly chart that indicates weakness in the near term. The Sensex fell 54 points or 0.16 per cent in the previous week. But it continues to test vital resistance at 35,000.

Although the indicators in the daily chart feature in the positive territory, they now show signs of weakness.

Failure to break above this hurdle can drag the index down to 34,500 and then to 34,200. Subsequent key supports are at 34,000 and 33,600. That said, a strong break above 35,000 will push the index northwards to 35,400 and 35,800 in the upcoming weeks.

Medium-term trend: The index tests a key barrier at 35,000. A break above can take the index to 35,800 and 36,000 over the medium term. Next target above 36,000 is at 36,500. Supports for the medium-term are pegged at 34,000 and 33,400. The index can decline to 32,500 if it plummets below 33,400.

Bank Nifty (25,645.4)

Last week, the Bank Nifty managed to advance 250 points or 1 per cent, outperforming the bellwether indices. However, the index tests a key trend-deciding band between 25,500 and 25,700. An emphatic breach will change the medium-term downtrend that has been in place from the January peak of 27,652. Such a break can take the index higher to 26,000 initially and a strong rally beyond this level can test resistance at 26,500 over the medium term.

On the other hand, if the index fails to go beyond the trend-deciding level, a decline to 25,250 or 25,000 is possible. The contract can find base in the zone of 24,800 and 25,000. But a strong tumble below 24,800 will drag the index lower to 24,500 and then to 24,000 in the medium term. Traders with a short-term perspective can consider initiating fresh long positions on a rally beyond 25,700 with a fixed stop-loss.

Global cues

A strong rally on Friday trimmed the weekly loss in the Dow Jones Industrial Average. It has declined just 48 points and has ended at 24,262 levels. The index faces key resistances at 24,500 and 24,800 levels. It has a vital support at 24,000 and 23,600, which can cushion the index once again. But a decisive fall below 23,600 can pull the index down to 23,400 and 23,000.

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