The rally could face hurdles

The Nifty and the Sensex bounced back with good gains. But tread with caution

Following a positive start, the Nifty and the Sensex turned choppy in the middle of last week, but ended with good gains backed by Friday’s rally. In spite of the mid and small-cap indices ending in the negative territory and key sectoral indices such as healthcare and consumer durables declining, the Nifty and the Sensex surged higher supported by banking and energy stocks. The oil and gas sector stocks as well as PSU banking stocks attracted buying interest last week.

The bellwether indices could start the week reacting to the index of industrial production (IIP) data, which slowed to a five-month low of 4.4 per cent in March, and the exit poll outcome of the Karnataka State election. The election result to be announced on Tuesday can set the direction for the rest of the week. Given this significant event, investors should tread with caution in the week. The movement of rupee and crude oil, that have kept the market on edge, will also have a role to play in the week.

Nifty (10,806.5)

Last week, the Nifty 50 index managed to surpass the key resistance level of 10,700 by gaining 188 points or 1.8 per cent. The index hovers well above its 21 and 50-day moving averages.

Short-term trend: Since recording a trough at around 10,000 in late March, the index has been on a short-term uptrend. Even though the index has moved above the key resistance level of 10,700, thanks to the smart 0.84 per cent gain on Friday, the indicators in the daily chart continue to show signs of weakness. There is a decrease in daily volume too.

The daily price rate of change indicator is charting downwards, displaying a negative divergence which signifies a potential near-term trend reversal. These factors can lead the index into an unstable phase.

A slump below the immediate support level of 10,700 can pull the index down to 10,600-10,550 range and then to 10,450 levels.

These supports can cushion the corrective decline. Next key support below 10,450 is at 10,350. An emphatic break below this support level will mar the uptrend and pull the index lower to 10,250 and 10,100 levels. Thereafter, supports at 10,000, 9,700 and 9,500 levels can come into play.

But there are some contradictory signs too. Both the daily as well as weekly relative strength index have re-entered the bullish zone from the neutral region, backing the up-move. On the upside, the index has reached its first target of 10,800 last week. If it sustains the current upward impetus, the index can accelerate higher to 10,900 and then to 11,000 in the week.

Medium-term trend: Last week, the index managed to surpass the immediate resistance at 10,700 that was a key trend-deciding level. That said, the index needs to sustain above this level for a week to confirm that the trend has altered upwards. In that scenario, it will reinforce the uptrend that has been in place since March and take it higher to 11,000 and 11,200 in the medium term.

Conversely, any corrective decline in the index can find support at the key medium-term base at 10,400. But a decline below this level can bring back bearish momentum and pull the index down to10,200 and 10,000 in the medium term. Next key base to watch are at 9,500 and 9,200 levels.

Sensex (35,535.7)

After initial choppiness, the Sensex advanced 0.8 per cent on Friday, taking its weekly gains to 1.78 per cent or 620 points. This rally has negated the bearish view formed the week before. Though the index has ended above the key resistance level of 35,500, the indicators in the daily chart continue to show negative divergence and weakness. Inability to sustain the bullish momentum can drag the index down to 35,500 levels initially. And a conclusive fall below this base can drag the index down to 34,500 levels in the near term. Subsequent supports are pegged at 34,200; 34,000 and 33,600.

But if the index manages to hold above 35,000 levels, it can extend the short-term uptrend that has been in place since March lows. Next levels to watch are at 35,800 and 36,000.

Medium-term trend: Last week, the index breached the key barrier at 35,000. To confirm whether the breach is decisive or not another weekly close above this level is required. If the index manages to stay above 35,000 levels, it can extend the up-move to 35,800 and 36,000 over the coming weeks.

Subsequent target is 36,500. On the other hand, key support to note is placed at 34,000. A strong tumble below this level will mitigate the on-going uptrend and drag the index down to 33,400. Next supports are at 33,000 and 32,500.



Nifty Bank (26,413.1)

The Bank Nifty had another good performance last week, extending its up-move by surging 767 points or 3 per cent. This rally has conclusively breached the key trend-deciding band between 25,500 and 25,700 and altered the medium-term trend into an up-move. Also, the index seems to have resumed its long-term uptrend.

The short-term uptrend that has been in place from the March low has strengthened. However, the index faces a key resistance ahead at 26,500. A strong breakthrough of the barrier will take the index northwards to 27,000 and then to 27,500 in the upcoming weeks. That said, if the index witnesses a correction, key immediate supports at 26,000 and 25,700 can provide base.

Next significant support is in the 24,800-25,000 range. Only a decisive fall below this range will alter the current uptrend and pull the index down to 24,500 and then to 24,000 in the medium term. Traders with a short-term horizon can hold their long positions with a fixed stop-loss at 26,100 level.

Global cues

The Dow Jones Industrial Average breached a key resistance at 24,500 and has gained 568 points or 2.35 per cent to close at 24,831 last week. It now tests the next resistance at 24,800. Further breakthrough of this barrier can pave way for an up-move to 25,000 and 25,300 levels. Key supports to note are placed at 24,500 and 24,000 levels.

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