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Index Outlook: Is a short-lived recovery possible in Sensex & Nifty 50?

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Sharp fall in the Indian benchmark indices last week. But that was much in line with our expectation. Sensex and Nifty 50 tumbled by 3.94 per cent and 4 per cent respectively.

Among the sectors, the BSE Consumer Durables and the BSE Realty were beaten down the most. Both the indices had tumbled over 8 per cent each last week.

The trigger for the fall came from the Reserve Bank of India (RBI) on Wednesday. The RBI surprised the markets with a 40-basis points (bps) rate hike last week. This made the Sensex and Nifty break their range on the downside and fall sharply. The recovery on Thursday after the US Federal Reserve’s less hawkish tone was short-lived. The indices failed to get a strong follow-through rise and extended the fall sharply on Friday.

The downside break of the range and the fall in both the Sensex and Nifty were in line with our expectation. This keeps our broader bearish view intact on the indices. Though a recovery rally is possible in the near term, that is likely to be short-lived. As such we will be looking for more fall in the coming weeks.

The Foreign Portfolio Investors (FPIs) continue to sell the Indian equities. They had sold $840 million in the equity segment last week.

Nifty 50 (16,411.25)

Nifty has broken its 16,800-17,400 range on the downside as expected. The fall to 16,380 has also happened. It made a low of 16,340.9 on Friday and has bounced slightly from there to close at 16,411,25, down 4.04 per cent.

The week ahead: There is an immediate support at 16,275. This can hold on its first test. A bounce from there to 16,630 or 16,715 is possible this week. These are the two important resistances to watch for this week.

A rise past 16,715 is less likely as fresh sellers are likely to come back into the market at higher levels. As such, we can expect the Nifty to reverse lower again either from 16,630 itself or from 16,715. That reversal will take it down again towards 16,380-16,275.

An eventual break below 16,275 can take the Nifty down to 16,000 and 15,850 in the near term.

However, if Nifty breaks above 16,715, an extended rise to 17,000 can be seen.

Trading strategy: The targets of 16,820 and 16,640 on the short positions recommended last week were achieved.

Though there is a chance for a rise, we would prefer to remain on the sell side of the market. So traders can wait for a rise and go short at 16,610. Add more shorts at 16,680. Keep the stop-loss at 16,780. Trail the stop-loss down to 16,580 as soon as the index falls to 16,470. Move the stop-loss further down to 16,480 as soon as the index touches 16,410. Book profits at 16,380.

Medium-term outlook: The medium-term bearish view remains intact.  Strong resistance will now be in the 17,000-17,200 region. Intermediate support is at 16,000 and 15,850. A break below 15,850 can accelerate the fall to 15,000. A break below 15,000 can see an extended fall to 14,500-14,000. We reiterate that 15,000-14,000 is a strong support zone where the current fall can halt. That will be a good opportunity to buy from a long-term perspective.

Trading strategy: Positional traders can hold the short positions taken a couple of weeks back at 17,171.  The revised stop-loss is now at 16,900. Move the stop-loss down to 16,100 as soon as the index touches 15,600 on the downside. Book profits at 15,100.

Sensex (54,835.58)

The huge gap-down open on Friday has dragged the Sensex well below the crucial level of 56,000. The index made a low of 54,586.75 on Friday and closed at 54,835.58, down 3.9 per cent for the week.

The week ahead: Near-term support is in the 54,500-54,400 region. Considering the sharp fall seen last week, the chances are high for the Sensex to sustain above 54,400 for some time. A corrective bounce to 55,200 or 55,500 is possible this week. A break above 55,500 can see an extended rise to 56,000-56,200. However, a further rise past 56,200 is unlikely.

Chart Source: Metastock

Chart Source: Metastock

Sensex can turn down either from 55,500 itself or after the extended rise to 56,000-56,200. Such a reversal can drag it down to 54,500 once again in near term 

A break below 54,500 will see a fresh fall toward 54,000-53,000 in the short term.

Medium-term outlook: The bearish view of seeing 52,000 and 50,000 on the downside remains intact. A break below 50,000 can see an extended fall to 49,000.

A decisive break below 54,000 will open doors for that fall. As we have been mentioning for some time, 50,000-49,000 is a strong support zone from where a fresh long-term rally can begin.

Nifty Bank (34,591.2)

As expected, the Nifty Bank index has declined breaking below the key support level of 35,500. It has closed the week at 34,591.2, down 4.15 per cent for the week.

Chart Source: Metastock

Chart Source: Metastock

Supports are at 34,000 and 33,500 and can be tested this week. However, we expect the Nifty Bank index to sustain above 33,500 on its first test and see a corrective bounce. Such a bounce can take the index up to 35,500 or to a maximum of 36,000. Thereafter the index can reverse lower again.

A strong break below 33,500 will be very bearish and it can drag the Nifty Bank index down to 32,000 and even lower in the coming weeks 

Trading strategy: The trailing stop-loss at 35,800 on the short position taken at 36,352 has been hit. Traders can now wait for a rise and take fresh short positions at 35,200 and 35,800. Keep the stop-loss at 36,400. Trail the stop-loss down to 34,800 as soon as the index falls to 34,200. Move the stop-loss further down to 34,200 as soon as the index touches 33,900.  Book profits at 33,700

What to watch

Resistances at 16,630 and 16,715 on Nifty

Resistances at 55,200 and 55,500 on Sensex

Support at 32,100-31,900 on the Dow

Global cues

The Dow Jones Industrial Average (32,899.37) began the week on a positive note. It surged to a high of 34,117 on Friday after the US Federal Reserve meeting outcome. The US Fed raised the rates by 50 basis points in line with the market expectation. The central bank hinted for a reduced chances of more aggressive rate hikes in its upcoming meetings.

However, the Dow failed to get a strong follow-through rise and then fell sharply in the last two trading days. The index tumbled 4.8 per cent from its high to make a low of 32,474 on Friday before closing at 32.899.

The index has a very crucial resistance in the 32,100-31,900 region. The Dow has to sustain above this support zone and rise past 33,000 in order to ease the downside pressure and revisit 34,000 levels. A strong break below 31,900 will be bearish to see 31,000. It will also bring the danger of seeing even 29,000 on the downside.

Published on May 07, 2022

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