Index Outlook: Sensex, Nifty 50: In last leg of correction

Nifty 50 and Sensex they were knocked off for the fourth week in a row. Both indices fell by more than 2% each. Last week we said that the benchmarks may bounce back from their support. That view turned out to be wrong.

Last week’s fall confirms a head and shoulder pattern on daily charts of Sensex and Nifty. That leaves the near-term outlook bearish for the indices. It also keeps the door open for indices to fall further in the near term. A short-term recovery is a possibility, but it will be short-lived.

However, from a bigger picture, we could be in the final stages of this correction. We expect Indian benchmarks to resume their broader uptrend after this latest fall leg.

Pull factors

The continued outflow of foreign money is one of the major factors that dragged Indian markets down during this month. Foreign portfolio investors (FPIs) sold about $962 million in the equity segment last week. For the month of October, there was a net outflow of about $10.21 billion.

Ongoing geopolitical tensions in West Asia and uncertainty over the outcome of the US presidential election are also weighing on capital markets. The US election is next week on November 5, 2024.

Sector performance

All sectoral indices were badly beaten last week. The BVB Realty, BVB PSU, BVB Oil & Gas and BVB capital goods indices were down more than 7% each. The BVB IT index, down 1.57 percent, was the least beaten among sectors.

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Nifty 50 (24,180.80)

Nifty failed to sustain the bounce that was seen earlier in the week. It hit a high of 24,978.30 and then fell sharply below the 24,400 support. We expected this support to remain. But that didn’t happen. The Nifty hit a low of 24,073.90 before closing the week at 24,180.80, down 2.71%.

Short term view: The outlook is bearish. Immediate support is in the 23,950-23,900 region, which can be tested now. A bounce from there may trigger a recovery rally towards 24,500-24,600. But an increase of more than 24,600 is less likely now. It will need a strong positive trigger.

So, we expect Nifty to reverse again from 24,500-24,600 resistance zone and break below 23,900. Such a break may pull the Nifty up to 23,500 and even 23,000 in the short term.

To avoid this drop to 23,500-23,000, Nifty needs to support above 23,900 and breach 24,600.

Medium-term view: The broader trend is still rising. The recent fall is a correction in this regard. The region around 23,000 is strong support. We expect the current decline to stop there.

A further rise from around 23,000 will keep the overall uptrend intact. This rally stage will have the potential to take the Nifty up to 26,000-27,000 in the medium term.

If the Nifty breaks below 23,000, then there is a danger of seeing a steeper fall to 22,000-21,000.

Nifty Bank (50,787.45)

The Nifty Bank index broke the resistance at 52,400 last week as expected but failed to sustain. It hit a high of 52,577.50 and then fell sharply, giving back all gains. The index hit a low of 50,382.10 and ended the week at 50,787.45, down 2.51%.

Short term view: There is limited scope for the Nifty Bank index to decline from here. Strong supports exist at 49,700 and 49,400. The index may drop to test these short-term supports.

But after this fall, the Nifty Bank index may reverse again. This reversal may take the index up to 51,000-52,000 again.

Medium-term view: There is no change in the big picture. The 49,650-54,470 range on the monthly chart remains intact. There is also strong support around 49,000. So, as long as the Nifty Bank index remains above 49,000, the long-term outlook is bullish. So, a bullish breakout above 54,470 is likely to be seen eventually going forward. This break will open the doors for the Nifty Bank index to target 57,000-58,000 in the coming months.

The bullish view will only go wrong if the index falls below 49,000. If this happens, we may see a drop to 47,000. But that seems unlikely.

Sensex (79,402.29)

The Sensex fell last week, falling below the 80,300 support. It fell to a low of 79,137.98 before closing the week at 79,402.29, down 2.24%.

Short term view: The outlook is negative. Strong resistance is now in the 80,500-80,600 region. Immediate support is 78,600. Any rejection from here will be capped at 80,600.

As long as the Sensex remains below 80,600, the outlook will remain negative. As such, we can expect the Sensex to break the support at 78,600 eventually in the coming days. Such a break may pull the Sensex up to 77,500-77,000 in the short term.

After this fall, a move back to 80,000 is a possibility.

Medium-term view: The region around 77,000 is strong support. The current decline may stop here and the broader uptrend is likely to resume later. A fresh rally leg from around 77,000 will have the potential to take the Sensex up to 88,000 in the coming months.

The index will come under pressure for a further decline only if it breaks below 77,000. In this case, the downward movement may extend to 75,000.

Dow Jones (42,114.40)

The Dow Jones Industrial Average snapped its six-week rally. The index failed to rally strongly after 43,300 and fell sharply last week. It fell below 42,500, an intermediate support that we expected to hold. The Dow Jones hit a low of 42,051.39 on Friday before closing the week at 42,114.40. The index fell 2.68% during the week.

Outlook: The broader uptrend is intact. The recent fall is a correction in this regard. Crucial support is at 41,800, which can be tested this week. A bounce from there will keep the broader uptrend intact. It will also keep the door open for the Dow Jones to target 44,000-44,500 higher.

The uptrend will only be threatened if the index falls below 41,800. If this happens, the Dow Jones may fall to 41,000 and even below. We will have to keep a close eye on the price action around 41,800.