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Dissector: CNX Bank Index

In our March 2010 review of CNX Bank Index (Bank Nifty) we had written that sideways move between 8,000 and 9,500 can be followed by a surge towards the index's previous peak of 10,775. In line with our expectation, the index moved sideways and found support just above 8,800 level and it subsequently rallied to achieve our price target of 10,775 in August 2010. The index continued to trend higher until it marked an all-time high at 13,303 on November 5.

The index formed a bearish engulfing pattern in the weekly chart backing the trend reversal. Since then it has been on a medium-term downtrend. The index tumbled 5.6 per cent during second week of January 2010, penetrating its key support around 11,125 (presently strong resistance level). It also breached its 200-day moving average around 10,850.

The index is currently trading well below 50- and 21-day moving averages.

Medium-term outlook

The Bank Nifty is currently testing key twin support around 10,500 and it is in deadlock between intermediate-term up trendline and medium-term down trendline.

A strong fall below this support in the days aheadwill signal resumption of the downtrend and reinforce bearish momentum. In that scenario, it can drag the Index down to 9,870 and then to its subsequent support at 9,135 levels in the medium-term. As long as the index hovers below 11,900 levels, the medium-term downtrend stays in place.

Only emphatic surges above this level will mitigate the downtrend and can lift the index higher to 12,500 or 12,750 over the medium-term.

Short-term outlook

Bank Nifty (closed at 10,578.2) is extremely volatile in the short-term and is moving sideways between 10,500 and 11,125 from January 12. It tested its upper and lower boundary's twice and is poised above its lower boundary. The daily relative strength index is on the brink of entering in to the bearish zone from the neutral region. Its daily MACD is featuring in the negative territory without any reversal signs. Decisive fall below 10,500 levels can pull the index down to 10,300 and 10,250 ranges in the short-term. A reversal from the current levels will lift the Bank Nifty to 10,900, which is an immediate resistance and then to 11,125. Key resistance above this level is pegged at 11,500.

— Yoganand D.

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