Index Outlook: Short-term trend reversal likely

The Nifty recorded a new high last week, but selling pressure due to the onset of profit booking at higher levels pulled the index lower. Concerns over problems besetting the GST system and increasing geopolitical tensions also affected investor sentiment.

Last week, the US Fed left interest rates unchanged while signalling the possibility of one more rate hike by the end of the year. It also indicated that it would start unwinding its balance sheet soon. This led to a dollar rally, making foreign portfolio investors pull money out of the Indian market.

Global cues, September month derivatives expiry and rupee movement can keep the stock market volatile in the coming week. Investors need to tread with caution.

With sustained bullish momentum, the Nifty 50 started the previous week on a positive note and recorded a new high of 10,178.9 on Tuesday. However, after experiencing selling pressure and profit-taking at higher levels, the index started to decline. Friday’s sharp fall of 1.6 per cent wiped out the initial gains and the index closed at 9,964.4, declining 121 points or 1.2 per cent. This fall has breached a key support level at 10,000.

Short-term view: Following the recent sharp fall, the short-term uptrend that has been in place since early August, low of 9,685, is under threat now. The index has slipped below the psychological support level of 10,000 on Friday, weakening the short-term uptrend. Moreover, the index has formed a bearish engulfing candlestick pattern in the weekly chart indicating that a short-term trend reversal is on the cards. The daily relative strength index has re-entered the neutral region from the bullish zone and the weekly RSI is likely to enter the neutral region from the bullish zone. Further, the weekly RSI is displaying negative divergence backing the index’s short-term trend reversal.

Further, both the daily and weekly price rate of change indicators are also showing negative divergence and are about to enter the negative territory. A slip into the negative territory will imply emerging selling interest.

The index currently tests its 21 and 50-day moving averages and hovers above a key support level of 9,900. Strong plunge below this base level will confirm the trend reversal. In that case, the index can decline to 9,800 levels. Subsequent key supports are at 9,750 and 9,700 levels. Traders with a short-term perspective should tread with caution in the coming week and can consider initiating fresh short positions on an emphatic fall below 9,900 with a fixed stop-loss.

That said, an upward reversal from the immediate support level of 9,900 is likely to be a short-lived corrective rally. Key resistances at 10,000 or 10,130 can limit the upside. Next vital resistance is placed at 10,150 levels. Strong break above this level can push the index northwards to 10,200 and 10,300 in the short term.

Medium-term view: After breaching a key resistance level of 9,700 in early July, the index has been in a sideways consolidation phase in the wide band between 9,700 and 10,130. A downward fall below 9,800 can find support at 9,700 levels in the coming weeks.

Having said that, the prolonged negative divergence in the weekly relative strength index and price rate of change is a cause for concern. Also, the formation of a bearish engulfing candlestick pattern in the weekly chart is a negative.

A clear medium-term direction or trend will emerge if the index breaches either 9,700 or 10,130 levels. Decisive fall below 9,700 can reinforce the bearish momentum and pull the index down to 9,500.

Next key supports are placed at 9,300 and 9,120 levels. On the other hand, if the index manages to breach the upper boundary at 10,130, it can pave the way for an up-move to 10,500 and 10,854 levels in the medium term.

Last week, the Bank Nifty tumbled 475 points or 1.9 per cent — under-performing the broader indices. The index has breached its 21 and 50-day moving averages and closed below them. Formation of bearish engulfing candlestick pattern in the weekly chart and the displaying negative divergence in oscillators pose threats to the uptrend.

The Bank Nifty may continue to decline in the coming week and test the immediate support at 24,100 and 24,000 levels. Further plunge below 24,000 can pull the index down to 23,850; 23,700 and 23,500 in the short to medium term. Traders with a short-term view can go short with a stop-loss at 24,580 levels.

Nevertheless, an emphatic rally beyond 24,600 will be a corrective up move and the index can test resistances at 24,700 and 25,000 once again. Next vital resistance is pegged at 25,200 levels.

Though the Sensex started the previous week on a positive note, the significant resistance level of 32,500 capped its up move. After testing this hurdle, the index lost bullish momentum and fell sharply on Friday. It is currently poised above the next key support level of 31,800 and tests the 21 as well as 50-day moving averages. A strong fall below 31,800 will add fuel to the bearish momentum and drag the index down to 31,500 and 31,200 levels in the short to medium term. Support below 31,200 is at 31,000. Key barriers to note are at 32,250 and 32,500. An emphatic upward break of 32,500 is needed to strengthen bullish momentum and push the index northwards to 32,700 and 33,000 in the medium term.

Last week, the Dow Jones Industrial Average extended its rally by advancing 81 points or 0.37 per cent to close at 22,349.5. However, the index witnesses selling pressure at higher levels. A strong rally above the immediate resistance level of 22,400 is required to take the index higher to 22,500 levels.

Conversely, if the index slumps below 22,200 levels, it can decline further to test the key support level of 22,000 in the short term.

The Nikkei 225 index continued it’s upward move by gaining 386 points or almost two per cent to close at 20,296 levels last week. However, the index tests a vital resistance at 20,300 levels. Strong rally above this level can take it higher to 20,500 levels. But a downward reversal can pull the index down to 20,000 and 19,900 levels.