Index outlook: Investors must tread with caution

Key supports cushioned the Sensex and the Nifty last week. Stay cautious in the week ahead

Following an initial decline due to geo-political tensions, the Nifty and the Sensex found support at crucial levels. Subsequent recovery in the global market drove domestic indices higher. The BoE kept rates unchanged last week. After the OPEC meet, the crude oil price witnessed a strong rally on Friday, with reports suggesting that the increase in supply agreed to by OPEC and non-OPEC countries was lower than expected. June month derivative expiry can keep the benchmark indices volatile.

 

 

Nifty 50 (10,821.8)

After the initial decline, the Nifty index took support at 10,700 and recovered its initial loss. It closed almost flat last week

Short-term trend: The short-term uptrend that has been in place from the March 2018 low at around 9,950 remains intact. Last week, the key support at 10,700 held well and provided cushion for the index. We reiterate that the index could face a vital resistance ahead in the 10,900-10,930 zone. This barrier can limit the upside in the near future. A strong breakthrough of this barrier will strengthen the uptrend and take the index to 11,000 initially and then to 11,100 levels. The index trades well above its 21- and 50-day moving averages. Both the daily and weekly indicators are showing mixed cues. Traders with a short-term view should tread with caution once again.

On the downside, a corrective decline, if it happens, can find support at 10,700 once again. That said, an emphatic downward breakthrough of this key near-term support level will bring back the bearish momentum and drag the index lower to 10,600 and 10,550 levels.

A fall below 10,700 will also confirm the trend reversal and could weaken the uptrend as well. Next vital supports are at 10,420 and 10,350. The index requires a conclusive fall below 10,350 to alter the short-term uptrend. In such a scenario, the supports at 10,250 and 10,100 will come into play.

Medium-term trend: The sideways movement between 10,400 and 10,900 has been in place since early May. It is this sideways phase that continues to keep the medium-term trend, indecisive. Last week, the index tested the key trend-deciding support at 10,700 and moved higher. A strong rally above 10,900 is needed to alter the downtrend and take the index northwards to 11,000 and 11,200 in the medium term. Conversely, if the index plunges below the lower boundary of 10,400, it can reinforce the bearishness and drag the index lower to 10,200 and 10,000 in the medium term.

Sensex (35,689.6)

Last week, the Sensex managed to add 67 points or 0.19 per cent amid volatility. The indicators and oscillators in the daily chart are on the brink of re-entering the bullish zone, while the weekly indicators feature in the bullish zone. The index can test an immediate resistance at 35,800. Moreover, the range between 35,800 and 36,000 is a vital resistance. A strong break above this level can take the Sensex to 36,200 levels.

Nevertheless, a decline below the immediate support level of 35,500 can drag the index lower to 35,200 and 35,000 levels in the short term. Further fall below the 34,800-35,000 band will strengthen the downtrend and pull the index lower to 34,500 levels. Next support is at 34,300 .

Medium-term trend: There is no change in the medium-term view; the index continues to vacillate sideways at the 35,000-mark over the last two months. Once again, it has managed to close above the 35,500 . But a strong break about the 36,000 will take the index up to 36,200 and 36,400. Conversely, a plunge below the key base level of 34,000 can pull the index down to 33,400 levels in the medium term. Subsequent supports are at 33,000 and 32,500.

Nifty Bank (26,766.8)

Following an initial fall, the Bank Nifty took support at 26,224 and bounced back strongly. The index outperformed the bellwether indices last week and advanced 1.3 per cent.

The daily relative strength index is on the brink of re-entering the bullish zone and the weekly RSI features in the bullish zone. Both the daily and weekly price rate of change indicators hover in the positive terrain implying buying interest.

Last week’s rally has breached key resistance at 26,500 levels as well. The index faces next resistance at 27,000. A conclusive break above this level will strengthen the uptrend that has been in place since last March. Such a break-out will push the index higher to 27,500 and 28,000 over the medium term.

Conversely, if the index fails to move beyond 27,000, it can consolidate sideways in the wide range between 26,000 and 27,000 for a while. A decisive plunge below immediate support in the band between 26,000 and 26,100 will confirm the reversal and drag the index down to 25,500-25,600 zone in the short to medium term. Traders with a short-term horizon should tread with caution as long as the index trades below 27,000.

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