Index Outlook: Indices poised for a rally

The year 2016 was a roller-coaster for domestic equity markets. The Nifty 50 index, during the year, recorded a low of 6,825.8 on February 29 and subsequently moved up to mark a high of 8,968.7 on September 7. The index rose 239 points or 3 per cent in 2016. The Sensex initially slumped to a low of 22,494.6 on February 29 and thereafter climbed northwards to register the year’s high of 29,077.2 on September 8. During 2016, the index net gained 508 points or almost 2 per cent.

Since recording the 2016 highs in September, the indices began to retreat and wiped out almost the entire gains recoded earlier in the year. Losses were mainly triggered by major global factors such as US Fed rate hikes, Brexit jitters, US presidential elections, oil price concerns and currency woes. Demonetisation was the major domestic setback.

Both the Nifty and the Sensex advanced more than 2 per cent in the last week of 2016 on the back of short-covering and bargain hunting on key stocks, helping the indices post positive yearly gains. China Caixin manufacturing PMI, US initial jobless claims and the US crude inventories report are some of the key global events market participants will watch in the first week of January 2017. Auto sales numbers for the month of December 2016 will be in the spotlight for investors in auto stocks.

Last week, the Nifty 50 index started on a negative note; however, after taking support at around 7,900, it did a volte-face and climbed 200 points. It closed well above its 21-day moving average, showing initial signs of bullishness.

This week: The Nifty 50 has formed a bullish engulfing candlestick pattern in the weekly chart, indicating bullish reversal in the short-term trend.

The daily moving average convergence divergence indicator is displaying positive divergence, backing the reversal. However, the index is facing a key resistance level ahead at 8,200. We reiterate that the index needs to decisively move beyond the immediate resistance at 8,200 at the start of the week to reinforce the bullish momentum. Then, the index can continue its up-move and test subsequent resistances at 8,300 and 8,400 levels in the short term. The daily as well as weekly relative strength indices feature in the neutral region, with an upward bias. The daily price rate of change indicator has entered the positive territory, implying buying interest. Traders with a short-term perspective can consider initiating fresh long positions on a strong rally above 8,200 with a tight stop-loss.

The index needs to emphatically rally beyond 8,300 levels to alter the short-term downtrend. Then, the key resistances at 8,400 and 8,500 levels will be tested in the upcoming weeks. On the other hand, a slump below the immediate base level of 8,100 will bring back selling pressure and pull the index down to 8,000 or even to 7,900 levels. Key support below 7,900 is at 7,800 levels.

Medium-term trend: The medium-term trend continues to be down despite strong bounce-back in the previous week. A strong breakthrough of the key medium-term resistance at 8,500 is required to alter the downtrend and take the index upwards. In that case, the index can trend up to 8,700 and 8,900, which are the next key resistances.

That said, if the index plunges below the key support level of 7,900, it will strengthen the downtrend and pull it down to 7,800. Subsequent medium-term supports are at 7,700 and 7,600.

The Sensex rose 585 points or almost 2 per cent, forming a bullish engulfing candlestick pattern in the weekly chart. Formation of the pattern at a key base level of 26,000 also implies bullishness. The index has closed above the immediate resistance level of 26,500. However, it faces crucial short-term trend-deciding resistance at 27,000 which is also a psychological barrier. A strong rally beyond this level can take the index higher to 27,500. A further break-out of 27,500 is needed to change the medium-term downtrend and take the Sensex higher to 28,000. Key supports to note are 26,230 and 26,000. A decline below the second support will bring back selling interest in the index and pull it down to 25,500 and then to 25,000 levels in the medium term.

Last week, the Bank Nifty added 293 points or 1.6 per cent. The index managed to close above the key resistance level of 18,000. Traders with a short-term view can buy on declines with a stop-loss at 17,950. Continuation of the up-move in the index can test resistance at 18,500 and then 18,700 in the coming week. A strong rally beyond 18,700 can push the index higher to 19,000 levels. Conversely, inability to move beyond 18,500 can keep the index vacillating between 18,000 and 18,500. Key supports below 18,000 are at 17,650 and 17,500 levels.

The Dow Jones Industrial Average fell 171 points to close at 19,762, forming a bearish engulfing candlestick pattern in the weekly chart. This pattern has short-term bearish implications. The index can decline to 19,500 levels in the near term. Key resistance is in the band between 19,950 and 20,000. A decisive fall below 19,500 can drag the index further down to 19,200 and 19,000 levels.