Index Outlook: Indices in a pre-budget rally

Bullish cues from the global markets and the robust December quarter earnings announcements frombluechip companies kept the bellwether indices trending upwards. The Nifty 50 and the Sensex can extend their rally in the truncated week, taking cues from the quarterly results announcement of bluechip stocks. However, the mid- and small-cap indices are showing divergent trend. This, along with the US markets hitting overbought territory, is a cause for worry. The January derivatives expiry, ahead of a long weekend, can trigger some profit-booking in the latter part of the week. The market is likely to now turn its focus on the upcoming Budget.

Last week, the Nifty 50 index extended its rally by surging 213 points or 2 per cent, amid volatility. The index has conclusively surpassed a near-term resistance tested at 10,750 levels. It trades well above the 21- and 50-day moving averages.

Short-term trend: The index accelerated and continued its short-term uptrend that has been in place from the early December low at 10,033. Strong rally above the key medium-term resistance at 10,500 has strengthened the uptrend. Moreover, the index has surpassed a minor hurdle at 10,750 last week, which has reinforced the bullish momentum. There has been an increase in daily volume over the past four trading sessions. The daily and weekly relative strength indices feature in the bullish zone, supporting the bullish momentum. Similarly, the daily as well as weekly price rate of change indicators hover in the positive territory implying buying interest.

However, the weekly price rate of change and weekly moving average convergence divergence indicators are showing negative divergence, which is a cause for concern.

The mid- and small-cap indices displayed a diverging trend by plummeting last week. The Nifty index can experience selling pressure and profit-taking in the near term.

Such a corrective decline can find supports at either 10,750 or 10,500. The index has a significant medium-term support in the band between 10,450 and 10,500. Last week, the index surpassed the short-term target of 10,800 and is currently heading towards to the next at 10,921. Further rally above this level can take the index higher to 11,000, and it could face some difficulty in surpassing this psychological level. But an emphatic breakthrough of 11,000-mark can keep the bullish momentum ticking and push the index northwards to 11,200 levels in the medium term.

Conversely, we reiterate that a conclusive decline below the 10,450 will be a threat to the ongoing uptrend. In that case, the index can decline to 10,350 and 10,250 levels. Next vital support for the index is pegged in the 10,000 and 10,100 zone. Investors with a short-term view can remain invested with a trailing stop-loss at 10,500 levels.

Medium-term trend: The breakthrough of the key resistance at 10,500 and last week’s strong rally has strengthened the medium-term uptrend that has been in place since taking support at 9,500 levels last June. Investors with a medium-term horizon can stay invested with an improved stop-loss at 10,150 levels. An emphatic breakthrough of the psychological resistance at 11,000 can accelerate the medium-term uptrend and take the index higher 11,200 and 11,500 in the coming months with minor corrective declines. On the other hand, strong plunge below the key support at 10,450 can find support at 10,250. Further plunge below the psychological support level of 10,000 will be a threat to the uptrend and, in that scenario, the index can fall to 9,700.

The Bank Nifty experienced an unprecedented gain at higher levels as the index zoomed 1,160 points or 4.5 per cent breaking above a key resistance at 26,000 in the past week. The index closed at record highs. Nevertheless, the index faces a key resistance ahead at 27,000. Strong break above this barrier will further reinforce the bullish momentum and take the index northwards to 27,500 and then to 28,000 in the medium term. The short-term outlook is bullish for the index. Traders with a short-term view should tread with caution with the stop-loss placed at 26,650, ahead of the truncated as well as derivatives expiry week. Profits can be booked if the index fails to move beyond 27,000. Immediate supports are placed at 26,650 and 26,430 levels. A decisive plunge below 26,430 can bring back selling pressure and pull the index down to 26,200 and 26,000 levels. On the downside, a close below the 26,000 will alter the short-term uptrend and drag the index down to the subsequent key supports placed at 25,700 and 25,500 levels.

The Sensex rocketed 919 points or 2.66 per cent, breaking above the key hurdle at 35,000 in the previous week and closed at record highs. This rally has outperformed the Nifty. The Sensex now tests a key barrier at 35,500. Any corrective decline can find support either at 35,350 or 35,000 in the near term. Continuation of the uptrend by breaching the current resistance at 35,500 can push the index northwards to 36,000 in the short to medium term. Key supports below 35,500 are placed at 34,750 and 34,500 levels. Only a strong close below the support in the 33,800-34,000 band is needed to alter the short-term uptrend and drag the index down to 33,500 over the medium term.

In the previous week, the Dow Jones Industrial Average continued its uptrend by gaining 268 points or 1 per cent to close at 26,071. The index now tests a key resistance at 26,000. With the daily and weekly indicators featuring in the overbought territory, the possibility of a corrective decline can’t be ruled out. Such a decline can find support at 25,500 and 25,000 levels in the short term. But a strong rally above 26,000 can take the index upwards to 26,200 and 26,400 levels.

The Nikkei 225 continues to test the crucial resistance at 24,000 over the past two weeks. A rally above the barrier is required to take the index higher to 24,500 in the short term. But an inability to rally above 24,000 can pull the index down to the support level of 23,500 and 23,000 in the short term.

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