Index outlook: Tough road ahead for the indices

Amidst volatility, the indices closed on a positive note in July. The Sensex rose 333 points or 1.2 per cent and the Nifty advanced 164 points or 1.9 per cent over the past month.

The Indian market has been choppy in the last two months, triggered byglobal and domestic concerns. Investors have found it difficult to guess the direction of the market. The indecisiveness still persists.

Indices saw the biggest one-day fall in the last two months on Monday, when both the Nifty and the Sensex tumbled almost 2 per cent on China's stock market rout and concerns over a likely tightening of P-notes rules.

However, the indices subsequently did a volte-face and gained more than 1 per cent on Friday, piloted by better-than-expected earnings by ICICI Bank. The CNX PSU Bank index also surged 4.7 per cent following the government’s proposal to infuse ₹70,000 crore in PSU banks over the next four years.

The retirement fund body — Employees’ Provident Fund Organisation (EPFO) — will start investing in equity markets from this week, with an initial corpus of ₹5,000 crore to be invested through ETFs in the current fiscal. The roll-over of F&O positions also witnessed a mild uptick, signalling a come back in investor interest.

On the global front, the Federal Open Market Committee (FOMC) kept rates unchanged during the meeting on Thursday, indicating once again that it plans to move cautiously. The US economy grew by 2.3 per cent in the second quarter following a 0.6 per cent growth in the first quarter. The European markets were mixed, but closed on a positive note.

All eyes now are on the Reserve Bank of India's upcoming monetary policy review scheduled for Tuesday, August 4. Since January this year, the RBI has reduced its key policy repo rate by 75 basis points. The ongoing results season and the RBI’s rate action are likely to keep markets on tenterhooks.

How they oscillate After an initial fall, the relative strength index in the chart is heading towards the bullish zone from the neutral region. The daily price rate of change indicator is trending upwards in the negative zone and the daily moving average convergence divergence feature in the positive territory implying upward momentum.

The weekly relative strength index is moving higher in the neutral region towards the bullish zone. The weekly MACD featuring in the positive territory backs the upward momentum. However, the monthly indicators are charting downwards which is still a cause for concern.

Nifty (8,532.8) After touching an intra-week low at 8,321, the Nifty bounced back and closed the week on a slightly positive note by gaining 11 points. It moved within a wide sideways band of 8,350 and 8,650.

The week ahead: The index faces a significant resistance ahead in the band between 8,600 and 8,650. A decisive breakthrough of this resistance band is needed to strengthen the bullish momentum and take the index higher to the next resistances at 8,808 and 8,957 levels.

The Nifty has moved past its 200-day moving average poised around 8,425 on Friday. Inability to move beyond the 8,600-8,650 resistance band can keep the index moving sideways in the wide range between 8,350 and 8,650 for a while before taking a clear direction. Key supports to note are pegged at 8,450, 8,400 and then at 8,350. But, the short-term trend will alter downwards on an emphatic fall below 8,350 levels. Such a fall can drag the index down to 8,200 or even to 8,000 levels.

Medium term trend: As the index continues to trades around the key medium-term trend zone between 8,600 and 8,650, we reiterate that a conclusive breakthrough of this band will have a bullish implication and take the index northwards to 9,000 levels. Conversely, a fall below 8,200 level will diminish the upward momentum.

Sensex (28,114.5) The Sensex was also volatile and closed the week almost on a flat note. The only positive was the close above its 200-day moving average at around 27,900.

The week ahead: The index could face a key resistance in the zone between 28,400 and 28,600 in the coming week. Strong rally above this zone will pave way for a rally to 28,800 and then to 29,094 levels.

On the other hand, the Sensex has immediate key support at 27,940 and also its 200-day moving average poised around 27,900. A conclusive fall below these levels will be cue for investors to desist taking fresh long positions. A strong fall can pull the index down to 27,750 and 27,620.

Global cues The US indices, Dow and S&P 500 closed on a positive note on the back of mixed economic cues. Canada's Canada S&P/TSX Composite index rebounded gaining 2 per cent after testing a key support level at 14,000 levels.

The European market saw a mixed trend as the FTSE 100 and CAC 40 ended on a positive note while the DAX closed on a negative note. The Shanghai Composite index tumbled 10 per cent to close at 3,663.7.

The Dow Jones took support at around 17,400 and bounced back last week. Nevertheless, it faces an important hurdle at 17,800.

A strong rally above this level is needed to take the index higher to 18000 or 18,100 in the short term. But a slump below 17,600 can re-test the support at 17,400 levels. Next support is pegged at 17,200. Crude oil extended its downfall by declining $1 per barrel to close at $47.1 for the week.

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