Stock prices slithered rapidly down a slippery slope in a truncated week. It was the rupee that was once again the harbinger of the crash. It threatened to go below the 62-mark against the dollar on Tuesday, pushing stocks off the edge.

The NSEL saga with all its complications kept investors and the regulators riveted. The announcement that Raghuram Rajan would take over from Duvvuri Subbarao also dominated conversations. With the economic indicators at their nadir and the rupee threatening to go into a tailspin, the new RBI Governor does have a tough fight on his hands. Quarterly earnings did not offer any solace to investors as they continued to disappoint and drill home the fact that both consumption as well as investment are slowing down.

Volumes were dull in both the cash and derivative segment indicating meagre investor interest. Surprisingly, foreign institutional investors were net buyers in equity in most sessions last week.

They have net purchased $189 million in equity in August so far while their net sales in debt in $695 million.

Indian benchmarks were not alone in facing a sell-off last week. Many of their peers from emerging Asia also ended the week in the red including the Taiwan Weighted Index, Jakarta Composite Index, KLSE Composite, Seoul Composite Index and Philippines’ PSE Composite Index.

As we face yet another holiday-shortened week, stocks are likely to continue to face volatility. The last batch of quarterly earnings is not expected to be very heartening. The slew of macro-economic data expected next week including the industrial production numbers, consumer price inflation and so on will give investors enough to fret about.

There is hardly any good news from the oscillator front.

The weekly oscillators are sinking deep into negative zone implying that the medium-term trend has turned adverse. Both the indices continue to trade below their 50 as well as 200-day moving averages. The 50-day moving average declining below the 200 DMA is also a cause for concern.

The silver lining in all this gloom is that the Sensex and the Nifty are close to important medium-term support zone. Since stock markets are known for their irrational moves, the indices might do a volte-face and move towards 20,000 and 6,200 yet gain, as the bargain-hunting brigade gets going.

Sensex (18,789.3)

The Sensex slid to the low of 18,551 before reversing slightly higher on Thursday. The index has a confluence of short-term supports in the vicinity, at 18,500, 18,344 and then at 18,186.

It is possible that the index reverses higher from this region. But if it moves lower, decline to 17,586 will be on the cards. Medium-term trend will turn negative only when the index goes on to close below this level.

The reversal that began on Thursday can attempt to pull the Sensex higher to 18,950 or 19,200 in the week ahead. Failure to move above the first resistance will mean that there is further pain in the offing. The index needs to close above 19,700 to signal that the short-term trend is reversing higher.

We maintain that the medium term trend is sideways between 18,000 and 20,500. Since the index is close to the lower end of this trading band, this could be the apt time to start bottom-fishing.

Nifty (5,565.6)

The Nifty was also badly battered last week as it declined to the intra-week low of 5,486.8. It has almost achieved our third target of the C wave from 6,229 peak that was indicated last week – at 5,430.

Short-term traders need to be cautious with their short positions at this juncture. The short-term rally that began on Thursday can take the index up to 5,614 or 5,688 in the week ahead. Reversal before reaching 5,688 will mean that the index can move lower in the coming weeks.

Downward targets in that event will be 5,390 and then 5,131. But the index is nearing important support from a medium-term perspective, around 5,480. Reversal from this level will mean that the index will move towards the upper end of the current trading band at 6,200 again. The index needs to breach the support at 5,480 to indicate that it is heading towards 5,380 or 5,178.

Global Cues

Global indices moved higher last week in quiet trading. Many of the investors appear to be away on their summer holidays resulting in a sedate movement in indices too. CBOE volatility index moved in a narrow band close to 12 implying that investors continue to be optimistic about stocks.

The Dow retreated slightly from higher levels last week, closing 232 points lower as US investors continued playing the guessing game on when the Federal Reserve would stop it quantitative easing. Immediate support for the index is at 15,245. This level needs to be breached to signal that the short-term trend could deteriorate. The medium-term trend will not be under threat unless the index closes below 14,550.

The Nikkei is also in a serious medium-term correction after retreating from the key resistance at 14,950. This index can now retreat to the zone between 12,500 and 13,000. The medium-term trend will reverse lower only on a close below 12,500.

The retreat of the dollar index from the high of 84.9 is good news for the rupee, commodities and emerging markets. As mentioned earlier, break beyond 85 could have set the stage for a sharp rise towards 89. But the ongoing decline makes sideways move between 79 and 85 more likely over the next few months.

>lokeshwarri.sk@thehindu.co.in

Related Topics
comment COMMENT NOW