Index Outlook: Investors should stay cautious

The rally in crude oil price to $58 in the initial part of the prior week kept global markets volatile, ahead of the Fed meeting.

But the meeting eased selling-pressure on the domestic indices in the latter part of the previous week. The Fed raised rates by a quarter basis point and indicated three rate hikes in 2018. The highlight of the meeting was the increase in GDP growth estimate for the US from 2.1 per cent in September to 2.5 per cent. The ECB kept rates unchanged, but increased growth forecasts, bringing cheer to global investors. Exit poll surveys predicting a comfortable win for BJP in both Himachal Pradesh and Gujarat also boosted the market. However, the actual outcome of the results on Monday will determine market direction.

While a win has been factored in to some extent, a loss for the BJP can lead to a market sell-off, at least in the early part of the week.

Last week, the Nifty managed to close on a positive note for the second consecutive week, gaining 67 points or 0.66 per cent in the midst of volatility.

Short-term trend: The downtrend that commenced from the early November high of 10,490 is weakening. Significant support in the band between 10,000 and 10,050 cushioned the index in first week of December. The index subsequently bounced up, witnessing a strong rally. Amid choppiness, it has breached its 21 and 50-day moving averages on Friday, by advancing 0.8 per cent in that session. It hovers well above the 21 and 50-day moving averages. However, the index now faces a key resistance ahead at 10,400.

A strong rally beyond this level will alter the downtrend and take the index higher to 10,500, which is a significant medium-term resistance. Further break through of 10,500 can take the index northwards to 10,600 and then to 10,800 in the short to medium term with some minor corrective dips. That said, if the index fails to move beyond 10,400, the corrective downtrend can continue for a while and the index can test the support at 10,250 initially. Further decline below this level can drag it down to 10,150 or even to the key base band of 10,000 and 10,050 in the short term.

An emphatic downward breach of this base band can pull Nifty down to 9,700. Investors with a short-term horizon can remain long as long as the index trades above 10,150 levels and consider taking partial profits at 10,500 levels if the index faces difficulty in surpassing it.

Medium-term trend: The medium-term trend continues to be up for the index. Investors with a medium-term perspective can remain invested with a deeper stop-loss at 9,700. A decisive upward break above 10,500 can take the index northwards to 10,800 and 10,921 in the medium term. On the other hand, only a strong decline below 9,700 is needed to alter the medium-term uptrend. Next key support below is at 9,500.

The Bank Nifty amidst choppiness, climbed 119 points or 0.5 per cent last week. The index now tests a significant resistance ahead at 25,500. A breach of this hurdle will encounter next resistance at 25,700, which is also a vital resistance level to keep note. Inability to surpass these resistances can keep the corrective decline that started from the recent peak of 25,953 intact and a fall to test the key support at 25,000 can’t be ruled out. Key immediate supports for the index are pegged at 25,200 and 25,000. A conclusive downward breach of 25,000 will be a threat to the short-term uptrend. In that scenario, the index can decline to 24,800 and 24,500 levels. On the other hand, if the Bank Nifty decisively moves beyond 25,700, it can rally to 26,000 in the short term. Traders with a short-term view should tread with caution and consider taking long positions above 25,700 with a fixed stop-loss. Key resistances above 26,000 are at 26,200 and 26,300.

The Sensex advanced 212 points or 0.64 per cent in the previous week, mainly driven by Friday’s rally of 0.65. The index managed to surpass a key barrier at 33,200 and its 21-day moving average last week. It now faces a key resistance at 33,700, from which it had reversed lower in early as well as late November. Hence, traders with a short-term perspective should tread with caution as long as the index hovers below 33,700. An emphatic break above this barrier can reinforce the bullish momentum and take it higher to 33,900 and 34,000 in the coming weeks.

The next medium-term target on a strong rally beyond 34,000 will be 34,500 and 35,000 with minor pauses. However, failure to move beyond 33,700 can keep the Sensex consolidating sideways in the wide range between 32,600 and 33,700. Key immediate supports to note are pegged at 33,200 and 33,000. A conclusive plunge below 33,000 can pull the index down to 32,600 and then to 32,500. Further fall below these levels can drag it down to 32,150 and 32,000.

The Dow Jones Industrial Average climbed 322 points or 1.3 per cent to close at a record high of 24,651.7. The indicators and oscillators are featuring in the overbought territory for the index, implying near-term correction in the offing. Key supports are at 24,300 and 24,000. Immediate resistances are at 24,700 and 25,000.

The Nikkei 225 declined 257 points or 1.13 per cent to close at 22,553 last week. Significant resistance at 23,000 has been limiting the upside since early November. Only a strong rally beyond this level can strengthen the bullish momentum and take the index higher to 23,300 and 23,500 levels in the short term. But a decisive fall below the immediate support level of 22400 can pull the index down to 22,000.