Technical Analysis

Key supports may come into play

Yoganand D | Updated on October 20, 2018 Published on October 20, 2018

While Nifty 50 and Sensex pulled back from key resistances, they may remain volatile

Last week’s initial rally in the domestic equity market failed to gain momentum. Instead, the indices plunged sharply towards the end of the week, triggered by a sharp fall in NBFC stocks. The ongoing NBFC turmoil can continue to rattle the markets and, hence, the benchmark Sensex and Nifty may remain volatile in the coming week as well.

That said, buying interest at lower levels and short-covering ahead of the October derivative expiry, can offer some relief. The crude oil price falling below $70 per barrel and the rupee marginally strengthening against the dollar can also cushion the bellwether indices.

On the global front, along with the ECB and Bank of Canada rate decisions this week, investors need to keep an eye on Italy’s Budget and the Q3 US GDP data, which can impact the Dow Jones and global equity indices.

Nifty (10,303.5)

Last week, after an initial rally, the Nifty 50 index retreated after encountering a key resistance around 10,700. The index slumped 168 points, or 1.6 per cent, on the back of selling pressure.

Short-term trend: Since registering a new high of 11,760 in late August, the index has been on a short-term downtrend, during which it conclusively breached its 50- and 200-day moving averages, hovering well below them. The near-term corrective rally faced resistance in the 10,600-10,700 band, beyond which the index resumed its downtrend. It now tests a vital support in the 10,200-10,300 range — that could provide it some cushion. A strong fall below the base can drag the index lower to the 10,000-10,100 support zone in the following week. The daily relative strength index (RSI) has moved back into the bearish zone from the neutral region, while the weekly RSI still hovers in the bearish zone.

An upward reversal from the current support range can take the index higher to 10,500 and then to 10,600 or 10,700 levels in the short term. As long as the index trades below 10,700 levels, it could stay range-bound between 10,000 and 10,700 for a while. On the upside, a decisive breakthrough past 10,700 can take it northwards to 10,754 and 10,800, a significant medium-term resistance level to watch for. The index needs to break out of the psychological hurdle at 11,000 to alter the downtrend and reinforce the bullish momentum. Next resistances are at 11,300 and 11,500. Conversely, a tumble below 10,000 will intensify the selling pressure and pull the index lower to 9,800 or 9,700 levels. However, investors with a short-term perspective and high risk appetite can take fresh long positions on declines with a revised stop-loss at 10,000.

Medium-term trend: Following a rally to the new high of 11,760 in late August, the index reversed its trend and has retraced its prior upmove, leaving the medium-term trend unclear.

A strong fall below the key psychological support level of 10,000 and the immediate support at 9,000 will strengthen the downtrend and pull the index down to 9,700 and 9,500 levels in the medium term.

Subsequent supports are at 9,200 and 9,000. On the other hand, a breakthrough of 11,000 is needed to take the index upwards to 11,300 and 11,500 levels in the medium term.

Sensex (34,315.6)

The Sensex retreated 417 points, or 1.2 per cent in the previous week. Key resistances at 35,200 and 35,600 limited the upside. A further fall in the index can find supports at 34,000 and 33,800 in the short term. But a tumble below 33,800 levels can drag the index lower to 33,600 and 33,350. The next vital support is placed at 33,000.

Conversely, an upward reversal from the key supports can take the index higher to 35,000. Breaking through this barrier can signal an upmove to 35,200 and 35,600 levels once again. A further break-out above 36,500 is needed to alter the short-term downtrend that is currently in place and take the index upwards to 37,000 and 37,400.

Nifty Bank (25,085.8)

The Bank Nifty retreated 310 points, or 1.2 per cent, last week, after encountering resistance around 25,800. The index now tests a key support at 25,000. The indicators in the daily and weekly charts display a mixed cue.

A decisive fall below 25,000 can drag the index down and can find supports at 24,500 or 24,250 level in the short term.

On the upside, a reversal from the current support and an emphatic break above 25,600 will bring back bullishness and take the index to 26,000.

The index needs to conclusively rally above 26,500 levels to change the short-term downtrend that has been in place from the August peak of 28,388.

Next targets are at 27,000 and 27,500 levels.

However, a strong decline below 24,250 can drag the index lower to 24,000 and then to 23,600 in the short to medium term.

Traders with a short-term perspective should tread with caution in the upcoming derivative expiry week.

Global cues

The Dow Jones Industrial Average had a breather last week. Amid volatility, the index climbed 104 points to close at 25,444.3. Key immediate resistances are pegged at 25,800 and 26,000.

A failure to move beyond these resistances can drag the index lower to 25,200 and 25,000 levels.

An emphatic plunge below 25,000 can drag the index lower to 24,500 in the short term. Significant resistances above 26,000 are at 26,200 and 26,400.

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