Technical Analysis

Index Outlook: Indices lack clear direction

Yoganand D | Updated on June 08, 2019 Published on June 08, 2019

Key indices declined slightly last week. They are up against a key resistance

The key domestic indices remained volatile in the previous truncated week as well, and declined in the latter part. The RBI reduced the key repo rate on Thursday and changed its stance to accommodative; despite that, the benchmark indices — the Sensex and the Nifty — slumped sharply on NBFC concerns. The indices could remain choppy in the ensuing weeks as they lack clear direction. The progress of the monsoon and the movement of the rupee need to be watched. On the global front, developments in the US-China trade war, US CPI, jobs data and retail sales in May need to be observed.

Nifty 50 (11,870.6)

The Nifty index continues to remain volatile. After recording a new high at 12,103 last Monday, it tested the vital resistance in the 12,000-12,040 range and eventually declined. It fell 52 points or 0.4 per cent last week. The index has formed a spinning top candlestick pattern in the weekly chart, implying indecisiveness in the near term.

Inability to move beyond the immediate resistance in the 12,000-12,040 band can extend the corrective decline to the key near-term support in the 11,700-11,750 zone. The daily relative strength index features in the neutral region and the daily price rate of change indicator is likely to enter the negative terrain.



An emphatic fall below this zone will weaken the short-term uptrend and show signs of trend reversal. A strong tumble under 11,600 can pull the index down to 11,500 or 11,400 levels in the ensuing weeks. To alter the short-term uptrend, the index needs to conclusively decline below 11,400 levels. Such a fall can drag it lower to 11,250 and 11,150 levels over the short term.

On the other hand, a decisive break-out of the above resistance band will strengthen the uptrend and take the index up. The index can then extend the rally to 12,200 and 12,500 in the short to medium term. Investors with a medium-term perspective can stay invested with a fixed stop-loss at 11,350 levels.

Medium-term trend: The medium-term trend is up and will remain intact as long as the index trades above the significant support in the 11,000-11,100 band. A strong break-out of the key psychological level of 12,000 can push the index up to 12,500 over the medium term. On the contrary, a decisive plunge below the key support band between 11,000 and 11,100 will alter the uptrend and pull the index lower to 10,800 and 10,600 levels over the medium term. Key supports to note are at 11,700 and 11,500 levels.

Sensex (39,615.9)

Last week, the Sensex recorded a new high at 40,312, amid choppiness. But it eventually declined 98 points or 0.25 per cent over the week. The index has formed a spinning top candlestick pattern in the weekly chart depicting indecisiveness. It continues to test the 40,000-mark, which is a key psychological resistance level.

An emphatic breakthrough of this barrier is needed to take the index up to 40,400 and 40,800 levels in the medium term. That said, failure to rally above 40,000 levels can drag the index down and cause a corrective decline.

We don’t rule out a sideways movement in the wide 38,000-40,000 band if the index fails to move beyond 40,000.

In that scenario, the index can find support at 39,000, 38,600 and 38,000 — the floor of the recent gap. But a conclusive fall below 38,000 will be a threat to the short-term uptrend. Such a fall can drag the index down to the next key support levels at 37,500 and 37,000.

Nifty Bank (31,066.5)

The Nifty Bank index underperformed the bellwether indices and declined 308 points or 1 per cent in the previous week. After testing a key resistance at 31,500, the index changed direction, triggered by negative divergence in the daily relative strength index. The daily RSI has slipped into the neutral region from the bullish zone.

The index currently tests support at 31,000. A strong fall below this base can drag it down to 30,500 in the coming week. A decisive downward break of 30,500 can pull the index down to 30,250 and 30,000 in the short term. Traders with a short-term view should tread with caution and consider initiating fresh short positions on a fall below 31,000 with a fixed stop-loss.

A further plunge below 29,500 can alter the short-term uptrend and pull it down to 29,000, which is the next key base level. Conversely, if the index breaks above the key resistance level of 31,500, it can alter the bearish stance and take the index up to 31,700 and 32,000 in the short to medium term. In this scenario, traders can go long with a fixed stop-loss.

Global cues

Taking support at 24,800, the Dow Jones Industrial Average skyrocketed 1,168 points or 4.7 per cent last week, breaking above a key resistance at 25,500. Forming a bullish engulfing candlestick pattern in the weekly chart, the index closed at 25,983.9. This pattern has bullish implications; however, the index currently tests resistance at 26,000. A decisive break above this level will alter the short-term downtrend and take the index up to 26,300 and 26,500 levels. Key supports to note are at 25,500 and 25,000. A fall below the immediate support at 25,500 can drag the index down to 25,000 again, and this will keep the downtrend intact.

The Nikkei 225 index gained 283 points or 1.4 per cent to end at 20,884.7. It faces resistance at 21,000. A strong break above this level can take the index up to 21,300 and 21,500 levels. Key supports are at 20,500 and 20,300 levels.

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