Technical Analysis

Index Outlook: Two steps forward, one backward

Lokeshwarri S K | Updated on March 12, 2018 Published on November 05, 2011

The dizzy Diwali week rally that had raised hopes of the Sensex squeezing past the 18,000 level dissolved with the ongoing crisis in Greece taking a new twist. The Prime Minister, Mr George Papandreou, in a display of political gamesmanship called for a referendum to accept the bailout package and then called off the move, sending equity prices initially reeling lower and then surging sharply.

The Sensex too plunged with the rest of global equities and then reversed higher mid-week. Other global events such as slowing manufacturing in China and rate cut by ECB also influenced domestic stock prices.

Volumes were tepid in both the cash and derivative segments as investors appeared undecided whether to jump in at these levels. FIIs have been net buyers so far this month. Open interest is also quite low around Rs 1,20,000 crore denoting low trading interest in the market.

The next episode in the Greek soap opera will be a cheerful one as the Greek Prime Minister has won the vote of confidence in the Hellenic Parliament. Investors' attention will stay riveted on this region in the truncated week ahead. Earnings announcements will continue to elicit stock specific reaction.

Oscillators in the daily chart of both the Sensex and the Nifty are drifting lower showing loss of momentum in the short-term. But the weekly oscillators are still in the bullish zone implying that the medium-term trend could still be on the course to reversing higher.

Sensex (17,562.6)

The Sensex could not garner the strength to move past the resistance zone between 17,800 and 18,200 discussed last week. This continues to be critical medium-term resistance and failure to move above this level will mean that the Sensex will move between 16,000 and 18,000 for the rest of the year.

On the other hand, sharp move beyond this level will take the Sensex to the next medium-term targets at 18,460 or 19,066.

Though the Sensex gave up some ground last week, the short-term view continues to be positive. Investors need to keep watch over the area between 17,000 and 17,200 now. They can remain sanguine and buy in declines from a short-term perspective as long as the Sensex trades above this zone.

For the week ahead, the Sensex could attempt to rally to 17,900 or 18,000 (where the 200 day moving average is positioned). Reversal from these levels will result in range bound trading between 17,300 and 18,000. Target on a move above 18,000 is 18,434. Supports that investors need to watch out for are at 17,278, 17,193 and then 17,000.

Nifty (5,284.2)

The Nifty too recorded the low of 5,201 on Thursday before reversing to end the week 76 points lower. The short-term trend continues to be up and has not been marred by last week's correction. The index could again try to get near 5,400 early next week. Presence of the 200-day moving average as well as an important Fibonacci retracement resistance at this level makes it a strong near-term as well as medium-term hurdle. Traders should therefore stay wary around this level.

If the Nifty manages to get past, the targets are 5,431 and 5,572. However reversal from the resistance around 5,400 can take the index down to 5,200 again. The significant short-term support that traders need to watch is between 5,150 and 5,170. Fresh long positions are not recommended on a decline below this level. Subsequent supports are at 5,065 and 5,000.

We stay with the view that we are at a cross-road as far as medium-term trend is concerned. Strong move above 5,400 will mean a rally to 5,700 by the year-end whereas reversal from here will mean that the index can continue to wallow between 4,700 and 5,400 for the rest of the year.

Global Cues

Global equity markets once more turned jittery, giving up some of the gains recorded over the past month. The medium-term downtrend appears to have resumed in many of the developed markets. The CBOE volatility index that had moved below 28 last week denoting optimism among investors, once more shot above this mark to record the intra-week high of 37 as the realisation sank in that the troubles of the Euro zone are not likely to go away in a hurry.

The Dow that had been coasting along merrily was yanked to the intra-week low of 11,630 by Tuesday. But it managed to recover thereafter to close the week just above the 200 day moving average at 11,983. Key short-term support for the index is at 11,650. If it manages to hold above this level next week, a shy at 12,700 or 12,876 by the end of this calendar would be possible.

Most Asian benchmarks recouped the losses towards weekend. The second consecutive positive weekly close in the Shanghai Composite Index is interesting, especially since it is reversing from a very important long-term support at 2,370.

Gold has once more reversed higher after retracing one-third of the gain made since October 2008. This means that the structural trend continues to be up for the yellow metal. It, however, faces immediate resistance at $1,775. Reversal from here will result in decline to $1,530 or $1,450 in the weeks ahead. Conversely move above $1,775 will take it towards a new high again.

The yellow metal is likely to get in to a broad trading range between $1,450 and $1,900 for a few months before attempting to move higher.

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