Technical Analysis

Index Outlook: Market enters a bumpy stretch

Yoganand D | Updated on January 20, 2018 Published on May 15, 2016

Global market trends and outcome of assembly polls can lead to volatility



The bellwether indices — the Nifty and the Sensex — began the week in a stunning way by gaining 1.7 per cent and 1.8 per cent respectively on Monday, taking cues from the global markets.

Strong gains from the sectoral indices such as auto, IT, energy and private sector banks added strength to the rally. A bout of buying by retail investors and foreign portfolio investors also kept the indices buoyant. Break above key resistance appears to have lent wings to the indices.

However, subsequent volatility capped the weekly upside on the indices. The trading sentiment deteriorated on Friday and the index witnessed marginal declines on profit taking on fears of tighter P-Notes norms and weaker US as well as European markets.

Moreover, the macro-economic data was disappointing. Retail inflation surged to 5.39 per cent in April whereas IIP growth was down to 0.1 per cent in March, denting chances of a rate cut by the RBI in the June review meeting. In the coming week, the global markets could dictate the movement. Outcome of the assembly polls in five States will also be the key factor to watch.

Nifty 50 (7,814.9)

Following a strong start and spike above the 200-day day, the index retreated on Friday to test this moving average.

Overall, the Nifty managed to stay above the key support level of 7,800 by gaining 81 points or 1 per cent last week.

The week ahead: The index found support at around 7,700 and witnessed an up-move. However, the rally was limited to the significant resistance level pegged at 7,900 levels. Volumes have been decreasing over the past couple of weeks.

The indicators in the daily chart such as price rate of change and relative strength index are moving downward, implying weakness. Friday’s decline can extend if the stocks start the week on a bearish note. The index can decline and find support once again at 7,700 in the near future.

If the index fails to hold at this base level then, a further decline to a significant support band between 7,550 and 7,600 is possible. Hence, traders should tread with caution in the upcoming week.

Consider initiating fresh short positions only on a slip below 7,700 levels. Conversely, strong move beyond the near-term resistance at 7,900 can take the index higher to 8,000 in the same period.

Medium-term trend: As the index is facing difficulty in surpassing the key resistance level of 8,000, it could move sideways in the wide band between 7,600 and 8,000 for a while.

A conclusive breach of the 8,000-mark will take the index higher to 8,100 and then to 8,175 in the medium term.

Subsequent hurdle at 8,300 will come to play thereafter. On the downside, a decisive plunge below the key support in the 7,550-7,600 zone can pull the index down.

The index can decline to 7,400 and 7,250 over the medium term. Investors with a medium-term perspective should watch the key support band carefully.

Sensex (25,489.5)

Last week, the Sensex rallied above the vital level of 25,500 on Monday. But the 200-day moving average at 25,750 limited the upside for the index and it moved back thereafter.

It now tests support at 25,500.

The week ahead: A decline below the current support level of 25,500 can pull the index down to 25,000, which is a crucial buttress.

However, further decline below this level can pull the index down to the next support level at 24,500 in the short term. As long as the index trades above 24,500, the uptrend that started from late February will be in place. Next supports are placed at 24,000 and 23,000.

An upward reversal can take the index to 25,800 and 26,000 in the near term. Only an emphatic breakthrough of 26,000 can pave way for an up-move to 26,300 and 26,500 in the short term.

Bank Nifty (16,716.9)

Taking support at 16,250 levels, the Bank Nifty surged 420 points or 2.6 per cent in the previous week.

However, the index met with resistance at 17,700 and fell 206 points or 1.2 per cent on Friday.

Any further decline can find support at 16,500 and then at 16,250 levels. Next supports are at 16,000 or 15,800 in the short term. Since late February, the index has been on a medium-term uptrend. As long as the index trades above the significant supports at 15,500 and 15,200, the uptrend will continue to be in place. Traders with a short-term view should tread with care in the week ahead.

Strong break-out of 17,000-mark will pave way of an up- move to 17,250 and 17,500. This up-move will also be a cue for initiating long position with a fixed stop-loss.

Global cues

The Dow Jones Industrial Average extended its decline for the third consecutive week by declining 205 points or 1.1 per cent to close at 17,535 levels. The index currently trades above a key support level of 17,500.

A tumble below this level can strengthen the bearish momentum and drag the index down to 17,200 or 17,000 levels in the short term. Key resistances are at 17,800 and 18,000.

Strong rally above the key resistance of 18,000 is required to reinforce the bullish momentum and push the index higher to the level of 18,351 or even new highs in the medium term.

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