Indices retreat on selling pressure

The Nifty and the Sensex have reversed direction. Investors must remain cautious

It was a volatile week for the bellwether indices, the Nifty and the Sensex. After an initial rally, the indices encountered resistances and retreated, triggered by the outcome of the Karnataka State election results. The political drama kept the market nervous and the benchmark indices continued to decline to close the week in the negative territory. Moreover, the mid and small-cap indices extended their declines in line with the broader market.

Although the market may have discounted the election results and its outcome in Karnataka last week, there is room for further decline, following the setback for the BJP in the State. However, global markets can give some direction to the market this week. The movements of the rupee and crude oil also need to be watched.

Nifty (10,596.4)

The Nifty 50 index started the previous week on a flat note and, subsequently, rallied to record an intra-week high of 10,929 on Tuesday. But due to selling pressure and profit-taking, the index did a volte-face from this high and tumbled 3 per cent. For the week, the index closed, falling 210 points or 1.9 per cent.

Short-term trend: Last week, the index moved in both directions. After an initial rally to an intra-week high of 10,929, it lost momentum and fell to a low of 10,589. The index ended near the intra-week low and formed a bearish engulfing candlestick pattern in the weekly chart, implying a short-term trend reversal. The negative divergence in the daily price rate of change indicator and relative strength index also back this trend reversal.

The daily indicators show signs of weakness. On Friday, the index fell 0.8 per cent, breaching its 21-day moving average and a key support level of 10,700 decisively. With this fall, the short-term uptrend that has been in place since recording a trough at around 10,000 in late March, is weakening.

An immediate support is pegged at 10,500. A decisive fall below the significant support level of 10,350 will mar this uptrend and drag the index down to 10,250 and then to 10,100. Subsequent supports are at 10,000, 9,700 and 9,500 levels.

On the upside, the index needs to move beyond 10,700 to bring back bullish momentum and take the index higher to 10,800 and 10,900 in the short term. The next key resistance is pegged at 11,000.

Medium-term trend: The recent fall below the key support level of 10,700 shows that the previous break above this level was a false breakthrough. The index had failed to sustain above the key level of 10,700 last week. The medium-term downtrend that has been on place from the January peak of 11,171 continues. The on-going downtrend can find support at the key medium-term base of 10,400 in the coming weeks. That said, a conclusive tumble below 10,400 can pull the index down to 10,200 and 10,000 over the medium term. Subsequent supports at 9,500 and 9,200 will come to play.

On the other hand, the index needs to emphatically break above the immediate resistance at 10,700 to bring back bullish momentum and take it northwards to 11,000 and 11,200. Such a decisive breakthrough will alter the downtrend.

Sensex (34,848.3)

The Sensex met with a key barrier at around 36,000 and began to decline last week. It formed a bearish engulfing candlestick pattern in the weekly charting, signifying a short-term trend reversal. The index has slumped 687 points or 1.9 per cent last week, falling below the immediate support at 35,000 as well as its 21-day moving average.

The daily indicators display negative divergence and are wakening, backing the short-term trend reversal. Further fall can drag the index down to 34,500.

However, inability to find support at 34,500 can pull the index down to 34,200, 34,000 and 33,600 over the short term. Key resistances are placed at 35,000 and 35,500. An emphatic rally above 35,500 is needed to take the index higher to 35,800 and 36,000.

Medium-term trend: The index, failing to sustain above the key support level of 35,000 last week, indicates that the break-out was not a decisive one. Hence, it can continue to remain in a medium-term downtrend. An emphatic plunge below 34,000 will strengthen the downtrend and drag the index down to 33,400 in the medium term. Subsequent supports are pegged at 33,000 and 32,500 levels. Conversely, if the index breached above the vital resistance level of 35,000 decisively, an up-move to 35,800 and 36,000 is possible.

Nifty Bank (25,875.6)

Last week, the Bank Nifty surpassed its key resistance at 26,500, but encountered resistance at around 27,000 and reversed direction, forming a grave-stone doji candlestick pattern on Tuesday, which is a bearish reversal pattern.

Since then, the index has been on a corrective decline, triggered by negative divergence in the daily price rate of change indicators. On Friday, it fell below its immediate support at 26,000 and is likely to extend its down-move. However, the next key support at 25,500 can provide a base in the near term. Traders can make use of rallies to initiate fresh short positions with a fixed stop-loss at 26,100 and exit at 25,500.

A conclusive fall below 25,500 will be a threat to the uptrend that has been in place from the March low of 23,605. Significant trend-deciding support is in the 24,800-25,000 range. A strong plunge below this level can drag the index down to 24,500 and 24,000 over the medium term.

Consversely, if the index manages to close above 26,200, it can move up to 26,500 in the short term. Further break above 26,500 can take it to 27,000 and 27,500 levels.

Global cues

The Dow Jones Industrial Average tested key resistances at 24,800 and 25,000 and fell marginally to close the week at 24,715, declining 116 points. These resistances continue to hold. The index can re-test these levels in the coming week as well. A strong break above 25,000 can take the index upwards to 25,300 and 25,500 levels. Supports are pegged at 24,500 and 24,000 levels.

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