Index outlook: Market edges upward

It was an uninteresting week for stocks. Investor participation was muted ahead of the year-end holiday season break. Foreign portfolio investors too were mostly missing and the government's failure to get the nod for the crucial GST (Goods and Services Tax) Bill kept the broader indices volatile.

Investors will be fervently hoping for a ‘Santa Claus Rally’ this week; a surge in the stock prices that often occurs in the week between Christmas and New Year's Day.

A positive start next week will keep the bullish momentum going and take the stocks higher. Traders might also purchase stocks in anticipation of a rally in the month of January, known as the January effect. Expiry of the December derivatives can usher in some choppiness.

Domestic investors’ participation and the movement of the rupee against the dollar can also determine the movement of the indices.

The Nifty extended its bullish momentum and surged 99 points or 1.3 per cent last week; the index closed at a three-week high. This rally is partly due to short-covering ahead of the F&O expiry scheduled this week. The daily relative strength index in the daily chart shows positive divergence that indicates trend reversal.

The price rate of change indicator in the daily chart, which was trading in the negative territory, has entered the positive territory and is comfortably placed, signalling buying interest. Other indicators such as the moving average convergence divergence indicator have signalled a buy and are moving higher. The weekly RSI features in the neutral region, but other indicators hovering in the negative terrain, are still a cause of worry.

The week ahead: After opening on a negative note on Monday, the Nifty recorded an intra-week low at 7,733.4 and continued to test the key resistance level of 7,800. The index breached this resistance as well as the 21-day moving average on Wednesday, which is a positive sign. As long as the index trades above the immediate key support band between 7,750 and 7,800, the near-term outlook will be optimistic.

Traders with a short-term view can initiate long positions on an upward reversal from this base zone with a stop-loss at 7,750. Near-term targets are 7,950 and 8,000. Nevertheless, strong plunge below 7,750 can bring back bearishness and drag the index down to 7,670 or 7,550. Further close below 7,550 will strengthen the downtrend and pull the index down to 7,500.

Medium-term trend: The index continues to be on a medium-term downtrend and there is no alteration in this trend as of now. Nifty has to conclusively break through the key resistance at 8,100 to alter the trend. Failure to move past 8,100 will keep the index in a wide range between 7,550 and 8,100 for a while. Medium-term support below 7,500 is at 7,350.

The index took support around 25,400 and continued its near-term rally that started from the recent low of 24,867. The Sensex breached its immediate resistance and 21-day moving average by gaining 319 points.

The weak ahead: The index can extend its up move in the coming week if it trades above 25,400. Near-term targets are 26,100 and 26,400. Inability to move beyond these resistances will keep the index moving in the band between 25,000 and 26,400 and there is a possibility of it testing the lower boundary once again. Significant support below 25,000 is at 24,500. Key medium-term resistance above 26,400 is pegged at 26,730.

The Bank Nifty too advanced 1.3 per cent in the past week. However, this rally has met with a key resistance in 16,800-16,900 band. The 21-day moving average is also poised around this resistance. Therefore, traders should tread with caution in the week ahead and consider taking long positions on a strong rally above 16,900. Ensuing targets are 17,100 and 17,400. But a downward reversal from the current levels can drag the index down to 16,600 and then to 16,300.

Largely, the global indices settled in the positive zone, as crude oil rebounds from multi-year lows. The CBOE volatility index continued its fall to close at 15.7. After taking support at around 17,100, the Dow bounced back smartly gaining 2.5 per cent last week and has encountered a key hurdle at 17,600.

A clear breakthrough can take the index northwards to 17,900 or 18,000. Significant medium-term resistance is at 18,300 and support is at 17,000.

A decisive fall below 17,000 will have bearish implication and can pull the index down to 16,684 and 16,377.