Index Outlook: The road could get bumpy

Indices are edging higher but indicators signal short-term weakness ahead

The bellwether indices advanced to record highs, triggered by the India Meteorological Department’s forecast of good monsoon. However, profit taking in the Bank Nifty made e investors cautious in the later part of the week.

In the midst of volatility, the Nifty 50 advanced 115 points or 1.24 per cent and the Sensex climbed 329 points or 1.1 per cent last week. Ongoing quarterly earnings announcement and progress of monsoon will determine the movement of the indices in near future.

The market’s reaction to the new series of IIP and CPI, will also be interesting to note. The Index of Industrial Production (IIP) with 2011-12 as the base year, rose 5 per cent in FY 17 and 2.7 per cent in March. India’s retail price inflation dropped to a new record low at 2.99 per cent in April from a nearly five-month high of 3.89 per cent in March on a lower base effect and lower food prices.

Nifty 50 (9,400.9)

After a volatile start, the Nifty index managed to move past the key resistance level of 9,350 and then 9,400 on the back of strong monsoon expectations. This rally has negated the bearish outlook projected last week.

Short-term trend: Though the Nifty 50 advanced and recorded new high last week, the indicators and oscillator in the daily chart are showing signs of weakness, implying upside could be limited, going forward. The index could move sideways in a wide range between 9,250 and 9,450 for while.

The daily relative strength index continues to show negative divergence while the weekly RSI has moved higher into the overbought territory. Both the daily and weekly price rate of change indicators are trending downwards and are also displaying negative divergence implying a potential trend reversal is on the charts. The daily volume has been decreasing over the past six trading session.

The index needs to decline below the immediate support levels of 9,300 and 9,250 levels for initial signs of weakness. Such a decline can pull the index down to 9,191 and then to 9,075 in the short term. We had reiterated that short-term investors can consider buying in declines as long as the index trades above 9,191. But, as the upside potential is capped, investors with a short-term view should remain cautious.

The index can encounter selling interest at higher level at around 9,500. Investors can take partial profits off the table if the index fails to move beyond 9,500 levels. Strong fall below 9,250 can strengthen the selling pressure and pull the index down to 9,190.

We reaffirm that the short-term uptrend will be altered if the index strongly falls below the key support level of 9,075. Subsequent supports are at 9,020 and 8,975.

Conversely, an emphatic rally above 9,500 can push the index higher to 9,600 in the short term.

Medium-term trend: As long as the index trades above the significant support level of 8,800, the medium-term uptrend will remain in place. The index could test 9,500 levels in the coming weeks. A decisive break above this level is needed to take the index upwards to 9,600 levels. If the Nifty index continues to moves higher, then 10,037 and 10,854 are the medium term targets. On the other hand, conclusive slump below 8,800 can strengthen the bearishness and pull the index down to 8,700 or 8,650 levels.

Sensex (30,188.1)

The Sensex managed to close marginally above the key resistance level of 30,000 last week. However, a strong weekly close above 30,000 is required to strengthen the near-term uptrend and take the index higher to 30,500 and 31,000 in the short to medium term. The daily indicators are showing sings of weakness. Immediate supports are at 29,600 and 29,500 that can be tested in the near term. Avoid taking fresh long positions if the index declines below the significant support level of 29,260. Next key supports to watch are placed at 29,000 and 28,500.

Bank Nifty (22,671.7)

Last week, the Bank Nifty index moved higher and registered a new high of 22,977.8. But, failed to sustain its bullish momentum and declined, formed a gravestone candlestick pattern in the weekly chart which has bearish implications. The daily relative strength index is showing negative divergence implying short-term trend reversal is on the cards. A strong decline below 22,500 can pull the index down to 22,300 initially. Strong plunge below 22,300 can reinforce the bearish momentum and drag Bank Nifty down to 22,000 in the short term.

As the index is reversing down from the key resistance level of 23,000 which could limit the upside now, traders with a short-term perspective should tread with caution. A decisive fall below the key support level of 22,300 will be cue for initiating fresh short positions with a stop-loss at 22,450 levels. Initial target is 22,000. Strong decline below 22,000 can drag the index lower to the 21,800-21,700 band. Next supports are at 21,500 and 21,400.

Read the rest of this article by Signing up for Portfolio.It's completely free!

What You'll Get


 Getting recommendations just for you...
This article is closed for comments.
Please Email the Editor