Waiting for a Santa Claus rally

The Indian stock markets are not in a celebratory mood as the markets enter the year-end holiday season. As the curtains are ready to come down on 2016, the Indian benchmark indices, after losing almost half the gains made between February and September, are now hovering almost flat at the same level as at the end of 2015. The Sensex (26,041) is down 0.3 per cent and the Nifty 50 (7,986) is up 0.5 per cent so far in 2016 with just one trading week left.

Among the sectors, the metals and oil and gas segments have outperformed the broader indices to a greater extent. The BSE Metal Index has surged 35 per cent and the BSE Oil and Gas index has rallied 25 per cent. This is thanks to the strong recovery rally in the metal and oil prices this year. Among the laggards, Healthcare and the IT sector were the worst hit in 2016 with the BSE Healthcare and BSE IT Index plummeting 14 per cent and 10.5 per cent respectively.

Most of the developed markets are already celebrating the Santa Claus rally in December while the Asian stock markets are witnessing a sell-off. The major US, UK and European indices have rallied between 2 and 8 per cent in December while the key Asian indices are down between 2 and 6 per cent. On the domestic front, the Sensex and Nifty 50 have fallen 2.3 per cent and 2.9 per cent respectively so far in December. Will Santa Claus help in triggering a sharp rally in the Indian stock markets in the final week of the year? Let us take a look at what the charts say.

Barring the slight bounce on Friday, the Nifty 50 traded on a negative note all through the week. The index fell 154 points and closed 1.9 per cent lower for the week.

This week : The Nifty 50 is currently poised above two crucial supports at 7,915 and 7,897 – the 50 per cent Fibonacci retracement level. A test of these levels is likely in the early part of the week. But whether the index manages to sustain above these supports or not will decide the next leg of move.

A strong bounce from the 7,915-7,897 support zone may take the index higher in the near-term to 8,100 and 8,136 – the 21-day moving average resistance. Further break above 8,136 will see the upmove extending to 8,275 and 8,300. Inability to break above 8,300 can trigger a pull-back move and keep the index inside the 7,900-8,300 range in the short term. But a strong break above 8,300 will ease the downside pressure and open doors for a fresh rise.

The downtrend that has been in place since September is intact. The price action on the weekly chart suggests that there could be room for the Nifty 50 to fall further. The trigger for a fresh fall may come on a decisive break below 7,897. Such a break may drag the index lower to 7,645 initially – the 61.8 per cent Fibonacci retracement support. It will also make the likelihood of a test of 7,500 levels high.

An immediate and a decisive break above 8,300 may minimize the probability of a fall to 7,645 and 7,500 levels. Such a break may ease the downside pressure and take the index higher to 8,400 and 8,500 initially. A strong break above 8,500 will be an initial signal of a medium-term trend reversal which will help the Nifty 50 rise to 8,750 and higher levels.

Sensex continued to trade under pressure all through the week. The index broke below the 21-day moving average support and fell 1.7 per cent last week.

This week : Sensex has crucial supports at 25,786 and 25,700 which are likely to be tested this week. If the index manages to reverse strongly higher from these levels, a bounce back move to 26,000 and 26,415 is possible. Further break above 26,415 will ease the downside pressure and take the index higher to 26,800 or 26,830. Inability to break above 26,830 can trigger a pull back move to 26,000 once again. In such a scenario, Sensex may remain range bound between 25,700 and 26,830 in the short-term.

The downtrend that has been in place since September will resume on a strong fall below 25,700. Such a break will see the Sensex declining to 25,000 and 24,730 – the 200-day moving average support level.

For the medium-term downtrend to reverse, the index will need a strong break above 26,830. A strong break above this hurdle will ease the downside pressure and take the index to 27,000 and 27,550. Such a rise will reduce the possibility of a fresh fall. However, the confirmation for the trend reversal can be obtained only if the Sensex manages to rise past 27,550 decisively.

The Dow Jones Industrial Average hovered below the key psychological 20,000 mark for most part of the week. A strong break above 20,000 will provide a trigger for further rise. Immediate targets will be 20,200 and 20,500. Support for the index is between 19,800 and 19,750. A fall below 19,750 can take the index lower to 19,600.