Index Outlook: Investors can retreat to the fence

The Nifty and Sensex breached key supports and are showing signs of trend reversal

It was an eventful week for both global as well as domestic markets, which kept investors nervous. The US unemployment grew more than expected in January, which fuelled expectations that inflation could be rising and could prompt the Fed to trigger faster rate hikes this year. Moreover, this caused the 10-year Treasury yield gain sharply, making debt more attractive than equity. Subsequently, the US markets logged a big fall on Friday.

Market report: Week ended February 2, 2018

 

 

The US dollar index is bottoming out from a short-term perspective, which could keep the stocks under selling pressure, going forward. This leaves some more room for the fall that could have a ripple effect on the Asian and Emerging markets and pull them lower. Following the domestic big event, Budget 2018, and implementation of the long term capital gains tax, which trigged the sell-off on Friday, investors will now keep an eye on the global markets.

The indices are witnessing selling pressure at higher levels. With the global markets under pressure, the nervousness in the domestic markets can fuel further declines. Investors should remain cautious. Focus will be on the RBI policy, rupee movement and global indices this week.

Nifty 50 (10,760.6)

Last week, the Nifty 50 index tumbled 309 points or 2.8 per cent. Friday's 2.3 per cent plunge has breached key support level of 11,000-mark and also another base level at 10,900.

Short-term trend: Now, the short-term uptrend that has been in place since taking support at December low at 10,033 is under threat.

Moreover, this uptrend appears to have reversed as the negative divergence is seen in the daily relative strength index and price rate of change indicator. Key supports at 11,000 and 10,900 as well as the short-term up trend-line were conclusively breached on Friday.

The index has formed a bearish engulfing candlestick pattern, indicating short-term trend reversal. However, the index currently tests a vital support at 10,750 which is the 38.2 per cent Fibonacci retracement level of the short term uptrend. An emphatic slump below this base level can pull the index down to 10,600 and then to 10,500 levels in the short term. The index has a significant medium-term support in the band between 10,450 and 10,500.

A tumble below this support will strengthen the downmove and can drag the index down to 10,350 and 10,250 levels. On the other hand, if the index manages to move beyond 10,900, it can witness a corrective rally that can push it higher to 11,000.

Further rally above 11,000-mark can take the index northwards to 11,100 and 11,200 in the short term.

As the index is witnessing selling pressure and is in reversal mode, traders as well as investors with a short-term perspective can consider booking profits and staying in side-lines.

Medium-term trend: The formation of a bearish engulfing candlestick pattern in the weekly chart at the key resistance level of 11,000, signifies that the index could have formed a medium-term peak at the recent high of 11,171. Although the medium-term uptrend is intact, this trend reversal is a threat. Investors with a medium-term horizon can also consider taking profits off the table.

A strong decline below the significant support band between 10,450 and 10,500 will weaken the uptrend and drag it to 10,000. Further decline will pull the index down to 9,700.

Conversely, a conclusive rally above 11,100 can bring back bullish momentum and take the index northwards to 11,200 initially and further rally will pave way for an up move to 11,500 with a minor pause at 11,300 in the medium term.

Nifty Bank (26,451.1)

The Bank Nifty nose-dived 994 points or 3.6 per cent in the previous week. With this fall, the index has formed a bearish engulfing candlestick pattern in the weekly chart, implying short-term trend reversal in the index. After testing the key barrier at 27,500, the index failed to surpass it and instead reversed direction from there.

The index breached a key immediate support at 27,000. It now tests the next base at 26,500. Further plunge below this key support can strengthen the down-move and pull the index down to the key support pegged at 26,200 and 26,000 in the short term. Traders with a short-term view can short in that case with a fixed stop-loss at 26,600 levels.

A tumble below 26,000 will alter the short-term uptrend and drag the index lower to the next support of 25,700 and 25,500 in the medium term. Vital resistances are at 27,000 and 27,500.

Sensex (35,066.7)

In the previous eventful week, the Sensex plummeted 983 points or 2.7 per cent, decisively breaking through a key support at 35,500. Nevertheless, the index tests a vital base at 35,000. A strong breach of this base will strengthen the down-move and pull the index down to 34,770 and then to 34,500. Further nose-dive below 34,500 and 34,000.

To mitigate the short-term uptrend, the index needs to conclusively decline below 34,000, which is a significant medium term support for the index. Subsequent supports are placed at 33,500 and 33,000. On the other hand, a decisive rally beyond the immediate resistance level of 35,500 is needed to bring back bullish momentum and take the index higher to 35,900-36,000 range. Further breakthrough of 36,000 can take the index northwards to 36,400 levels.

Global cues

The Dow Jones Industrial Average experienced biggest daily points drop since the financial crisis on Friday, diving 666 points. It also witnessed its biggest weekly loss in two years. The index has nose-dived 1,095 points or 4 per cent to close at 25,520.9 last week, breaching a key support at 26,000.

Near-term outlook is bearish for the index. It can extend and test supports at 25,300 and 25,000 in the coming weeks. Key resistances are placed at 26,000 and 26,400 levels.

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