Technical Analysis

Index Outlook: Rebound possible from key base

Yoganand D | Updated on July 13, 2019 Published on July 13, 2019

Bellwether indices fell sharply last week and tested vital supports

Both the Sensex and the Nifty experienced higher selling pressure and continued to slide post-Budget, ignoring positive global cues.

The complication caused by the higher surcharge on the super-rich being also applicable on some FPIs, including trusts and alternative investment funds, resulted in a wave of selling. The government’s refusal to back-track on the matter could spell further volatility in the days ahead.

The better-than-expected Q1 results of Infosys could cheer the market on Monday. But stocks will take their cues from other bluechips’ earnings announcements this week. The progress of the monsoon and rupee movement will also be keenly watched. On the global front, the US markets were upbeat and recorded new high as investors once again began betting on a Fed rate cut.

Nifty 50 (11,552.5)

Last week, the Nifty index slumped 258 points, or 2.2 per cent, breaking below the key support at 11,650. With the recent fall, the index edged out of the sideways range on the lower side. But it found support around 11,500 and continues to test this level. A strong rally above the immediate resistance level of 11,700 can witness a corrective rally to 11,800 and then to 11,850 levels.

A decisive break above the key resistance in the 11,850-11,900 band will strengthen the bullish momentum and drive the Nifty index northwards to 12,000, which is a key psychological resistance to note.

 

A further rally above this barrier will reinforce the medium-term uptrend and take the index northwards to 12,200 and 12,500 over the short to medium term. The index trades well below its 21- and 50-day moving averages. The indicators and oscillators in the daily and weekly charts are showing mixed trends. The ensuing week can lend direction for the index as it tests a key support at 11,500 levels.

On the other hand, an inability to move beyond 11,700 will keep the selling pressure intact and drag the index down.

A strong fall below 11,500 will push the index to 11,426, the floor of the gap created in mid-May this year.

An emphatic slump below this level will underpin the short-term downtrend that has been in place from the new high recorded at 12,103 in early June. Next key supports at 11,250 and 11,150 levels could be tested over the short to medium term.

As the index has slipped below the key support at 11,650, investors with a medium-term horizon can consider taking partial profits off the table at this juncture and remain invested with a stop-loss at 11,350 levels.

Medium-term trend: The index has tumbled below the key support, breaking below its sideways range. However, key supports at 11,500 and 11,200 can cushion it and, as long as it trades above the vital support of 11,000-11,100, the medium-term uptrend will remain in place. Nevertheless, a strong plunge below the key support level of 11,000 will mitigate the medium-term uptrend and pull the index lower.

Subsequent key medium-term supports are at 10,800 and 10,600. On the upside, a clear break-out of the significant resistance at 12,000 will strengthen the uptrend and boost the index to 12,500 in the medium term.

Sensex (38,736.2)

The blue-chip stock index, the Sensex, dropped 777 points, or almost 2 per cent, in the previous week, breaking below the key support level of 39,000. But, the next key support at around 38,600 cushioned the index last week.

A strong rally above 39,000 will once again keep the index range-bound between 39,000 and 40,000 for a while. Conversely, if the index falls decisively below the immediate support at 38,600, it can drag the index down to 38,000 levels in the short term.

Having said that, the index needs to conclusively tumble below 38,000 to deviate from the short term uptrend that has been in place since early May. Next key supports at 37,500 and 37,000 levels come into play thereafter.

We reiterate that a strong break through the key resistance in the 40,000-40,200 band will strengthen the uptrend and accelerate the index upwards to 40,400 and 40,800 levels over the medium term. Inability to rise above 40,000 can keep the index range-bound between 38,000 and 40,000 for some time.

Nifty Bank (30,601.4)

The Nifty Bank underperformed the benchmark indices and nose-dived 874 points, or 2.8 per cent, last week due to selling pressure at higher levels. The index now tests a key medium-term support at 30,500.

The indicators in the daily and weekly charts are trending down, implying selling interest. A strong fall below this base level will strengthen the bearish momentum and drag the index down to 30,000.

A further fall below 29,500 levels can weaken the short-term uptrend and drag the index down to 29,000 over the medium term.

Traders with a short-term perspective can initiate fresh short positions only on a strong fall below 30,500 levels with a fixed stop-loss. But an upward reversal from the current support level of 30,500 will keep the index range-bound in the broad 30,500-31,500 zone for a while.

An emphatic rally above 31,000 can take the index higher to the upper end at 31,500 in the short term. A decisive breakthrough of 31,500 can push the index higher to 31,700 and 32,000 levels over the medium term.

Global cues

In the previous week, the Dow Jones Industrial Average continued to trend upward by gaining 409 points or 1.5 per cent to close at a record high at 27,332.

An immediate resistance is at 27,500, and an emphatic break above this will strengthen the uptrend, revving the index to 28,000 over the medium term. Key supports below 27,000 are pegged at 26,500 and 26,000.

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