Index Outlook: Indices can extend their rally

The Nifty 50 and the Sensex extended their rally, but are perched at a temporary barrier

After forming a bullish engulfing candlestick pattern at a key support level in late December, both the Nifty 50 and Sensex reversed direction triggered by positive divergence. Since then, the benchmark indices have been on a short-term uptrend. Last week, following a slow start, the indices breached key resistances and 200-day moving average decisively. The Nifty surged 1.9 per cent whereas the Sensex climbed 1.8 per cent, posting their third consecutive weekly gains, backed by strong rally in banking stocks.

India's retail inflation eased further in December to nearly three-year low of 3.41 per cent year-on-year, according to data released on Thursday. The decline was due to weak demand as consumers grappled with cash crunch following demonetisation and falling prices of vegetables and pulses.

The start of the third quarter earnings announcements was on a mixed note, with the IT giants TCS and Infosys results applying downward pressure on the markets. Industrial production numbers for November were a positive surprise, growing 5.7 per cent against a contraction of 3.4 per cent in the same month a year ago. Third quarter earnings of blue-chip companies could dictate trend in the broader market this week.

Nifty 50 (8,400.5)

The Nifty 50 index breached a key resistance as well as 200-day moving average and advanced 156 points or 1.9 per cent last week.

This week: The index changed trend in late December and has been on a short-term uptrend since then. It trades well above its 21 and 50-day moving average which is a positive sign. However, the index currently tests a resistance at 8,400 levels and a minor selling pressure can emerge at this zone. The daily relative strength index features in the bullish zone, backing the bullish momentum, and the weekly RSI inches towards the bullish zone in the neutral region.

Buying interest could grow stronger in the coming week if the weekly price rate of change indicator, which is poised on the zero line, enters the positive territory. Traders with a short-term view can make use of the volatility to initiate fresh long position with a stop-loss at 8,200 levels. Continuation of the up-move can test the next resistances at 8,500 and 8,600 levels. Key supports at 8,300 and 8,200 can provide base. Subsequent supports are at 8,100 and 8,000. Desist initiating fresh long positions if the index falls below 8,200 levels.

Medium-term trend: The index is hovering at a crucial level. An emphatic breakthrough of the key resistance level of 8,500 will change the medium-term trend upwards. Then, the index can extend its up-move to the subsequent resistances at 8,700 and 8,900 in the coming months. Nevertheless, if the index slumps below the vital support level of 7,900, that cushioned the index in December, it will bring back selling pressure and drag it down to 7,800 levels. Next supports to note are placed at 7,700 and 7,600.

Sensex (27,238)

The Sensex jumped 478 points or 1.8 per cent, exceeding its 200-day moving average last week. Yet the index faces selling pressure at the key resistance level of 27,500. The short-term uptrend will be in place as long as the index trades above the crucial support level at around 26,700. Immediate support is placed at 27,000.

Strong fall below 26,700 will intensify the selling pressure and pull the index down to 26,500 and then to 26,230 levels. On the other hand, a breakthrough of the immediate resistance at 27,500 will strengthen the uptrend and change the medium-term downtrend. Then, the index can trend upward to 28,000 and 28,270 levels.

Bank Nifty (18,912)

Last week, the Bank Nifty gained 648 points or 3.6 per cent decisively, breaching its 200-day moving average. But the index now faces a significant resistance ahead at 19,000 levels. Near-term outlook is optimistic. Traders can make use of the choppiness at this resistance zone to initiate fresh long positions, while maintaining a stop-loss at 18,500 levels. Conclusive break-out of 19,000 can push the index higher to 19,300 and 19,500 levels in the short term. Supports are at 18,700 and 18,500 If the index plunges below 18,500 bearish momentum can emerge and drag the index lower to 18,270 and 18,000 levels.

Global cues

The Dow Jones Industrial Average slipped 78 points or 0.4 per cent to close at 19,885.7. It tests a key resistance at 20,000 and struggles to surpass this level. The index can now slip further to 19,500 levels in coming weeks. Conclusive decline below 19,500 can pull the index lower to 19,200 and 19,000 levels in the short term. Strong rally beyond 20,000 can push the index to new highs.

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