Technical Analysis

Index outlook: Down but not out

Lokeshwarri SK | Updated on March 12, 2018 Published on August 02, 2014

Market could face turbulence in the short term, but the long-term trend is robust

The exuberance at the Sensex scaling 26,000 gave way to circumspection, and investors decided it was time to take some money off the table. This is not surprising given that the Sensex and the Nifty have gained almost 18 per cent since the first week of May. With the Budget behind us and corporate earnings not providing much cheer, stocks could now enter a period of correction and consolidation.

Rise in geopolitical tension due to the fresh sanctions imposed on Russia, Argentina defaulting on its sovereign debt and the record loss in Banco Espirito Santo also affected global equity, currency and fixed income markets. As we have been reiterating, it is not just the Indian market, but many other global markets which are also at record highs, rendering them vulnerable.

Indian investors will once again turn their attention to the RBI as the monetary policy meeting is scheduled for this Tuesday. With the Governor expected to maintain status quo on rates, the indications given about future policy rate moves will be of greater interest to markets.

Economic data releases last week were hearty. Markit’s Purchasing Managers Index rose to a 17-month peak of 53 in July, reflecting improving sentiments. The index of eight core industries was also up 7 per cent in July over last year. It is now to be seen if these improvements are reflected in the industrial production numbers.

The progress of the monsoon, earnings of companies and the actions of the foreign portfolio investors will be keenly watched this week. The all-India monsoon deficiency reduced to 22 per cent as of last week. FPIs have been net buyers through last week but their net sales of $46 million on Thursday sent a wave of panic through equity market on Friday making the Sensex decline over 400 points in that session.

Daily oscillators are giving a sell signal but they have not cut below the neutral zone yet. This means that though the extreme short-term trend is down, the decline needs to extend a little further to signal a short-term trend reversal. The weekly oscillators are showing signs of strain but they haven’t buckled yet. In other words, there is no threat to the medium-term trend.

Sensex (25,480.8)

The Sensex took a step down in the early part of the week and then continued rolling lower to end 646 points down.

The week ahead: The Sensex put up a disappointing show, failing to move beyond 26,000 and declining instead, close to our first short-term support at 25,428.

The Sensex has critical short-term support in the zone between 25,375 and 25,450. The presence of the 50-day moving average at this level adds to its significance. Investors can therefore hold their short-term positions as long as the index trades above 25,375. Break of this level can pull the Sensex down to 24,892.

Rallies will face resistance at 25,802 and 26,000. Reversal from either of these levels will mean that the index will continue falling.

Medium-term trend: The medium-term trend in the Sensex is not under threat yet. The index continues to face strong resistance between 26,000 and 26,500. The upper boundary needs to be breached to take the index higher to 27,304 and 27,848.

We retain a positive medium-term view as long as the index trades above 24,000.

Nifty (7,602.6)

The plunge on Friday made the Nifty close the week with a loss of 187 points.

The week ahead: Despite the decline on Friday, the short-term trend in the index has not reversed lower. The index needs to record a strong close below 7,570 to turn this trend negative.

Traders can therefore initiate short positions if the index drops below 7,570 for the next target of 7,422.

Short-term resistances are at 7,694 and 7,746. Short-term traders can go short if the index reverses lower from either of these levels.

Medium-term trend: The medium-term view in the Nifty remains unaltered. As explained earlier, the index faces strong resistance in the zone between 7,800 and 7,900.

Failure to get past this zone will make the index move between 7,400 and 7,900 for few weeks before attempting to rally above 8,000. Key medium-term support stays at 7,100.

Global cues

Global markets underwent a bout of turbulence in the second part of the week. Most indices recorded losses last week. CBOE volatility index spiked higher to 17, a three-month high, reflecting the increase in panic levels among investors. DJ Euro STOXX 50 declined another 102 points last week, confirming a medium-term down-trend.

The 467-point decline in the Dow Jones Industrial Average has confirmed a short-term downtrend in the index. Immediate supports for the index are at 16,273 and 16,048. Medium-term trend will be threatened only on a close below 16,048. Next support is at 15,340.

Asian indices were relatively insulated with indices such as the Seoul Composite and the Shanghai Composite closing with strong gains.

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