Index Outlook: Bears emerge from their lairs

Investors edged towards the exit door last week as misgivings on the sustainability of the ongoing rally began seeping in. The fall was gradual in front-line stocks resulting in the Sensex and the Nifty closing around 1.5 per cent lower for the week. But the cut was much deeper in mid and small cap stocks with the BSE Midcap Index losing 3 per cent and the Smallcap Index closing around 4 per cent lower.

With corporate earnings for the third quarter not giving room for undue cheer and the CSO estimating the economy to grow at 5 per cent this fiscal, investors are being forced to admit that stock prices have little reason to move higher from these levels. Nerves are also likely to be stretched as we draw closer to the Union Budget. Strong response to NTPC’s offer for sale failed to buoy sentiments.

Most investors and traders appear to have withdrawn to the fence to wait out this correction resulting in low volumes in both cash and derivatives segment. Foreign institutional investors have, however, been steadfast in their support for Indian equities this calendar. They have net purchased stocks worth $3.2 billion so far in February. About $1.6 billion of this was in offers for sale of Oil India and NTPC.

Open interest has moved to Rs 129,000 crore. Traders holding short positions seem to have covered their positions in the ongoing correction. This is evidenced in index put call ratio declining below 1.

The week ahead promises to be a lively one for the stock markets. Yet another stock exchange, MCX-SX is set to throw its hat into the stocks arena. Some of the bigwigs such as SBI, ONGC, Tata Motors and so on will line up to regale investors with their quarterly numbers next week. The coming week is also heavy on economic data as CSO is scheduled to release industrial production and headline inflation numbers.

Oscillators in the daily chart have backed off deep into bearish zone following last week’s decline. Weekly oscillators are also dipping though they continue to feature in overbought zone. This means that the medium term outlook is not affected yet.

Sensex (19,484.8)

The Sensex could not make any headway last week. It reversed from Monday’s peak of 19,902 to close the week 296 points lower. The reversal, signalled by the evening star formation in the weekly chart, was confirmed by last week’s decline.

A short-term pullback in the early part of the coming week can take the index higher to 19,716 or 19,901. Reversal from either of these levels will mean that the index is readying for decline in the near-term. Move above 19,900 will take the index towards its recent peak at 20,203.

Short-term targets on decline below Friday’s low of 19,415 are 19,224 and 19,000.

The decline witnessed over the last two weeks has not dented the medium term uptrend yet. But as discussed earlier, there is significant resistance in the zone between 20,000 and 20,500 and there is a possibility of the move from June 2012 low ending here.

Medium-term investors need to keep a watch on the zone between 18,500 and 18,900. As long as the current bout of correction halts above this support zone, the possibility of a move above 20,000 again in near future remains open.

Nifty (5,903.5)

The Nifty reversed from the intra-week peak of 6,038 to end 95 points lower for the week. If there is a short-term pull-back early next week, it will face resistance at 5,970 or 6,024. Reversal around the first resistance will be the cue for short-term traders to go short with stop loss at 6,030.

Downward targets will then be 5,828 and 5,741.

If the index manages to rally beyond 6,024, it can have another shy at the recent peak at 6,112.

Medium-term trend in the Nifty has not been affected by the ongoing slide. Investors need to watch the support zone between 5,600 and 5,700. They need to start worrying only if this level is breached.

Global cues

Global markets were a mixed bag last week with many indices in emerging markets and Europe closing with losses even as the US markets went to new highs. The evening star pattern in DJ Euro Stoxx 50 implies that the uptrend that began last November could be coming to an end.

The Dow moved sideways around the 14,000 mark last week. But the hanging man doji pattern in the weekly candlestick chart of Dow is not very comforting as it indicates selling pressure. The sideways move witnessed over the last two weeks appears to be a consolidation phase in an uptrend and we will have to change our short-term view to negative only on a close below 13,730. The previous peak at 14,198 is the immediate target for the index on a break above 14,000.

Asian markets were a mixed bag too with some indices such as the Philippines Composite and Jakarta Composite continuing to log new highs whereas others such as Hang Seng and Nikkei slid lower.

Crude traded on Nymex has had a good run since last November, gaining 16 per cent. But the commodity is now nearing medium-term hurdle at $100. There could be pause at this level since it is also a psychological resistance. But target on a break above this level is $110.

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