Technical Analysis

Index outlook: A bumpy road ahead

Yoganand D BL Research Bureau | Updated on January 19, 2018 Published on January 31, 2016

Both indices face key resistance. Better clarity may emerge after the RBI meeting this week



The slow start in the equity markets ended on a strong positive note, thanks to the Bank of Japan’s negative interest rate policy for the first time on Friday. Indications that the US Fed may go slow on further rate hikes due to global economic uncertainties also helped. So did the prospects of more stimulus measures in Europe and Japan. Besides, the recovery in crude oil price also helped.

The Indian stock market was resilient in the initial sessions of the shortened week and vacillated sideways. Along with the global equities, both the Sensex and Nifty started the February derivatives series with a bang on Friday. The coming week will be crucial with the Reserve Bank of India's bi-monthly meeting scheduled on Tuesday. The RBI is expected to keep the key policy rates unchanged until the Budget, but surprises cannot be ruled out.

The daily relative strength index (RSI) of both the bellwether indices have displayed positive divergence signalling a short-term trend reversal. The weekly RSI has entered the neutral region from the bearish zone showing signs of strength. The price rate of change indicator is on the brink of entering the positive territory, and a strong entry will signal that buying interest is emerging.

Nifty 50 (7,563.5)

The index was choppy in the initial three sessions but surged on Friday, closing the week with 1.9 per cent gain.

The week ahead: The Nifty extended its up-move after some pause at around 7,450 levels. Key support at 7,400 cushioned it last week. The index is testing its 21-day moving average at 7,560. A strong move past this level can push the index higher to 7,700, which is the next key resistance level. An emphatic up move above 7,700 is required to alter the short-term outlook to positive. If the index begins on a weak note and declines in the next week, it can find support at 7,400. But, further fall below 7,400 can drag the index down to 7,300 or 7,250. The subsequent key support is at 7,057.

Medium term: That the index stayed above 7,400 the week ago is a positive sign. It needs to sustain above this level as well as above the Fibonacci retracement support level of the prior up-move at 7,374, for a couple of weeks to signify formation of an important base. A strong resistance level of 7,800 has to be breached for an up move to 8,000. A slump below 7,250 can drag the index down to 7,000 in the medium term.

Sensex (24,870.6)

The Sensex also jumped strongly on Friday, after pausing around 24,500 for the initial three sessions last week. The index gained added 435 points or 1.8 per cent.

The week ahead: The index is testing its 21-day moving average and has a crucial resistance ahead at 25,000. A decisive break through these resistances can reinforce the bullish sentiment and can push the index upwards to 25,500. The medium-term resistance is in the band between 26,000 and 26,200. Inability to move past 25,000 can keep the index wavering in the range between 24,000 and 25,000 for a while.

A strong fall below 24,000 will strengthen the downtrend. It can then slip to test supports at 23,833 and 23,446. Subsequent key supports are far below at 22,427 and 21,000.

Bank Nifty (15,522.4)

The Bank Nifty was volatile and closed on a positive note inching 24 points or 0.2 per cent last week. The index faces immediate resistances ahead at 15,800 and then at 16,154. To alter the short-term downtrend, the index needs to decisively move past 16,154 levels. Next hurdles are at 16,500 and in the 16,800 - 17,000 band.

A plunge below the immediate support level of 15,000 can reinforce the downtrend and drag the index down to 14,754 and then to 14,338 in the short term. In that case, traders can consider initiating fresh short positions.

Global cues

The CBOE VIX extended its decline after recording an intra-week high at 27.2 and closed the week on a negative note at 20.2.

Following a negative start, the Dow was volatile around the 16,000 mark through most of the week. But a sharp 2.4 per cent rally on Friday has pushed the index close to the key resistance level of 16,500. The index has to breach this resistance to strengthen the rally and move upward to 16,700 and then to 17,000 in the coming weeks. Failure to do so can drag the index down to 16,200 and then to 16,000 in the short term.

Last week, the Shanghai Composite tumbled 6 per cent breaching the key level of 2,900 and closed at 2,737. The index nose-dived 22.6 per cent in January. The Japanese benchmark index, Nikkei 225, zoomed 559 points or 3.3 per cent to close at 17,518.

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