Index Outlook: Investors waver at higher levels

The grim tone that the Reserve Bank of India’s Governor took in his monetary policy statement scared the Sensex off its 20,000 perch and sent the Nifty sliding from the 6,000 level.

Despite the Central Bank pandering to the wishes of the investment fraternity with a cut in repo rate and CRR, the concern expressed at the mounting deficits and inflation and the statement that such largesse cannot continue through the year, put a dampener on the proceedings.

Traders who had built derivative positions in expectation of the rally continuing had to unwind ahead of the expiry of the January derivative contracts on Thursday. This also applied downward pressure on prices. Volume in the derivative segment was at record high on the day of the credit policy meeting, crossing 2,50,000 crore. FIIs have infused a record $4 billion into the equity market so far this calendar.

With the credit policy out of the way, investors will now react to the rest of the quarterly numbers scheduled for announcement in the weeks ahead. Surge of inflow into global equity funds is a positive for our market. According to EPFR global, emerging market equity and bond funds attracted $5.1 billion in the last week of January with emerging Asia being the preferred destination.

Technical indicators are however displaying signs of fatigue. Oscillators in the daily chart are displaying negative divergence, recording lower peaks even as the indices are moving sideways. Daily relative strength index is declining towards the neutral region from the bullish zone. Signs of weakness are also now apparent in the weekly oscillators.

The evening star candlestick pattern in the weekly chart and the double mountain in the daily chart are worrisome. But we need to see the movement next week to confirm a downward reversal.

Sensex (19,781.2)

The Sensex hit the high of 20,203 on Tuesday before going in to a slump. The short-term trend has now reversed lower with the close below 19,884. Key short-term supports for the index are at 19,768 and 19,540.

Since the index is halting at the first support, it is possible that the index reverses upward in the early part of next week. In this case the index can go higher to 20,022 or 20,203 in the sessions ahead.

Targets on a strong close above 20,203 are 20,388 and 20,432.

If the index starts the week on the back-foot, the slide can continue to 19,651 or 19,535. Short-term investors need to start worrying only if the index closes below 19,535.

The medium-term trend in the index continues to be up, if we consider trend-following methods. But if we take account of the fact that there are multiple targets converging in the zone around 20,500, the corrective wave from 15,135 low can end around this zone. That the 20,000 level is a strong psychological hurdle does not help either. But the index will receive medium-term support in the zone between 18,500 and 18,700. Strong close below 18,500 is needed to reverse the medium-term outlook lower.

Nifty (5,998.9)

The Nifty hit the high of 6,111.8 before declining to the intra-week low of 5,983.2. After gyrating between 6,000 and 6,100 over the last two weeks, the short-term trend reversed lower last week. The index has immediate support at 5,978 and then 5,945. Traders need to close their long positions on close below the second support.

If the index reverses higher in the early part of next week, it can rise to 6,062 or 6,112 in the short-term. Inability to clear the first target will be a sign of weakness.

If the index manages to move beyond 6,112, next target is 6,143.

Medium-term trend for the Nifty continues to be up. The index has key support in the zone between 5,500 and 5,600. Medium-term trend will reverse lower only on a close below 5,500.

Global cues

Most global stock markets closed on a positive note last week. CBOE volatility index continued to move near its multi-year lows around 12 implying that investors are feeling complacent about the sustainability of the current uptrend.

The Dow built on its rally and went on to close above the 14,000 mark. Strong jobs data for 2012 and expansion in manufacturing activity in US boosted sentiments. The Dow is less than 2 per cent away from its life-time high of 14,198. Some volatility is expected as the index nears this level. Supports to watch out for are at 13,440 and 13,100.

Asian indices put up a mixed performance. While the Nikkei, Jakarta Composite and Philippines Composite Index continued surging higher, others such as KLSE Composite and Seoul Composite Index declined. The Shanghai Composite rallied over 5 per cent on signs of pick-up in the Chinese economy.


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