Index Outlook: Nifty 50, Sensex will stay in the long-term range

The Sensex recording a fresh life-time high of 40,392 last week has infused cheer and optimism among market participants. There are many pointing towards green shoots in automobile sales, good rains, festival sales and the recent corporate tax rate cut as reasons for the bullish sentiment in the Indian market.

It would, however, be better for investors to remain circumspect at current levels. The Sensex and the Nifty 50 are in a sideways move since September 2018, largely due to the continued demand for large-caps from institutional investors.

While the indices can move a little higher from these levels, the risk of their declining to the lower end of the long-term range, in the coming quarters, remains open.

Macro numbers are still far from comforting. The September quarter earnings of listed companies, which have announced results so far, show a decline in revenue as well as operating profit. It is apparent that the domestic conditions are not conducive for listed stocks yet.

Slowing global growth and the threat of acceleration in the trade war add further pressure.

With valuation of the Sensex and the Nifty still near the upper end of the long-term average band, it is quite likely that the indices could remain in a trading band for a while.

There is, however, an opportunity in smaller stocks that have borne the brunt of the sell-off so far. The BSE Mid-cap index is still down 19 per cent from its 2018 peak, while the Small-cap index is down 32 per cent. Investors can hunt for buying opportunities from this pile.

Nifty (11,890.6)

The Nifty moved sharply higher last week, closing near the 11,900 mark.

Short term trend

The short-term trend in the index has been clearly up since the low formed on October 7, 2019.

The third part of this move, which is currently in motion, has immediate targets of 12,093 and 12,114. Since the second target coincides with the previous peak formed at 12,103, traders need to watch out for the 12,100-level.

Short-term supports are at 11,550, 11,490 and 11,440.

Short-term trend will turn negative on a firm close below 11,500.

The 50- and 200-day moving averages present around the 11,250 to 11,300 zone will also be an important support to watch if a decline accelerates in the index.

Medium term trend

The medium-term trend threatened to turn negative in August and September 2019, when the Nifty 50 was on the verge of moving below 10,600. But the reversal from the September 19 low of 10,670 reiterates the view that the large-cap oriented benchmarks will be in the sideways range for a while.

With the index moving higher, it could test 12,100, where it will face resistance around the previous peak. Beyond that resistances are at 12,300 and 12,617.

We stay with the view that the final leg of the move that began in March 2016 is currently unfolding. The Nifty can go up to 12,617, as per this count.

But since this is a long-drawn correction phase, the index can once again turn lower after forming a peak in the 11,800 and 12,600 zone. The down-move that follows can once again drag it towards 10,000.

The most likely range for the ongoing correction is between 10,000 and 12,500. This can extend for few more quarters.

Strong close below 10,000 is needed to open the doors for a decline to 8,500.

Sensex (40,165)

Sensex hogged the limelight last week as it moved to a new high of 40,392. But the formation of spinning top candlesticks over the last two sessions indicates indecision. Traders need to watch their step with their long positions at these levels.

Short-term supports for the index will be at 39,750 and 39,300. Fresh long positions are not recommended on a close below the second support.

Further rally, from these levels, can take the index to 40,725 or 40,934.

Medium term range for the Sensex stays between 33,000 and 41,000. The crucial medium-term support zone for the Sensex is between 37,000 and 37,250.

Nifty Bank (30,330.5)

The Nifty Bank is also moving ahead strongly. Immediate targets for the index are 30,800 and 31,045. If these are crossed, the index could move to the previous peak around 31,674.

Short-term investors need to watch supports at 29,350 and 28,700. Long positions should be avoided on a close below the second support as the 200-day moving average is also positioned there.

Global cues

The US market has been on a dream run over the last few months with all the front-line indices such as the Nasdaq, the S&P 500 and the NYSE Composite at life-time highs.

The Dow Jones Industrial Average is just 1.5 per cent below its all-time high level. While the index has been forming higher bottoms, its upper boundary is capped around 27,300. This is worrying as it implies the index is unable to make headway beyond this zone.

The CBOE volatility index moved below 15. The index has not moved above 25 for the entire 2019, implying the US markets have mostly been sanguine.

Most emerging market benchmarks are however down in the dumps including the Hang Seng, Jakarta Composite, Malaysia’s KLSE, Mexico’s IPC, Philippines Composite, Seoul Composite, Shanghai Composite, Thailand, SET Index. It’s clear that the trade war and the global slowdown is affecting them adversely. The exceptions are Taiwan Weighted Index and SGX Nifty.