Index Outlook. Indices at the crossroads

The domestic equity markets started the truncated week with a bang. Both the Nifty and Sensex extended their bullish momentum and breached key hurdles. However, the benchmark indices subsequently turned volatile on profit-booking and trimmed their weekly gains after reports of a nuclear test in North Korea and uncertainty over the European Central Bank's (ECB) future policy steps.

Further, investors became cautious ahead of the July IIP and CPI data scheduled for Monday and booked profits last Friday. Traders should tread with caution in the coming week as markets will be closed on Tuesday for Bakri ID holiday.

First, the stocks will respond to the steep fall in the US markets on Monday. The Wholesale Price Index (WPI) is likely to be announced on Wednesday. Progress of the monsoon has to be monitored in the coming week as the country's rainfall during this season was 4-5 per cent below the long period average till September 9.

On the global front, Bank of England’s monetary policy meeting on Thursday and US industrial production and retail sales for August on the same day could influence trade too.

The Nifty 50 index extending its bullish momentum added 57 points or 0.6 per cent last week. But the selling pressure as well as profit booking at higher level shows signs of weakness.

This week: The formation of a shooting star candlestick pattern in the weekly chart shows ambivalence. Moreover, the daily relative strength index is displaying negative divergence implying trend reversal is on the cards and is on the brink of re-entering the neutral region from the bullish zone.

The daily moving average convergence divergence (MACD) indicator is also showing negative divergence. Volumes in the daily chart are decreasing. After recording an intra-week high at 8,968, the index began to witness selling pressure.

Strong fall below the immediate support at 8,800 can bring back selling pressure and drag the index down to the short term support levels at 8,718 and 8,654 in the coming week. Further slump below 8,654 can pull the index down to 8,500 and the short-term bullish momentum will be under threat.

Medium-term trend: Since late February troughs, the index has been on a medium-term uptrend. Only a decisive close below 8,000 will alter the trend. But the weakness in the weekly chart indicates that a corrective decline is possible and the index can move sideways thereafter. Strong fall below the 8,500 mark will imply further signs of weakness and pull the index down to 8,300 in the medium term.

On the other hand, a decisive rally beyond the psychological 9000 mark can take the index higher to 9,100 and 9,344. Investors can hold their long position as long as the index trades above 8,000.

Though the Sensex rallied beyond 28,500 levels on last Tuesday, it encountered a key resistance at 29,000 and began to reverse. Trimming its initial gains the index closed the week up by 265 points or 0.9 per cent.

This week: The short-term trend is up for the index. However, formation of a bearish engulfing candlestick pattern on Friday at the key resistance level of 29,000, showing signs of downward reversal.

Additionally, the daily relative strength index is displaying negative divergence backing the reversal. Strong tumble below 28,500 will be a threat for the short-term uptrend and pull the index down to 28,240 and then to 28,000 in the short term.

A conclusive breakthrough the key hurdle at 29,000 will alter the bearish outlook and take the index northwards to 28,941 and 29,332 in the same period.

Medium term: The medium-term trend is up for the Sensex. Only a decisive plunge below 26,200 will mitigate the up trend. Medium-term targets for the index are 29,130 and 30,104, on resumption of the uptrend.

On Friday, the Dow Jones Industrial Average plummeted 2 per cent, decisively breaking through key supports at 18,400 and 18,300 to close at 18,085.4. This fall has altered the short-term sideways movement to bearish. The index has conclusively breached its 21 and 50-day moving averages and trades well below them.

The short-term outlook is bearish for the index; it can extend its decline and test supports at 18,000. Further fall below this level can drag it down to 17,800 and then to 17,500 in the short to medium term.

Key resistances to note are pegged at 18,300 and 18,400.