Index outlook: Quiet optimism in Diwali week

We have much to be happy about this Diwali. There is optimism in the air with the Sensex up 8 per cent since last Muhurat trading day. The index is also up 20 per cent so far this year. This is a marked contrast to the despondent mood last Diwali when the Sensex had lost 18 per cent in the past year.

The week began with market participants nervously awaiting the outcome of the US Presidential poll. But the excitement generated on US President Barack Obama’s re-election did not last long as investors began agonising over the impending fiscal crisis in the US. Global stocks sold off in the second half of the week and Indian stocks also dragged lower in their wake.

Volumes were low in the first two sessions of the week as investors stayed on the fence ahead of US elections but picked up thereafter. As market struggled to move higher last week, the bears seem to have increased their short positions and this is reflected in the index put call ratio moving higher.

Oscillators in the daily chart are in the sell mode since September. Though these indicators have not gone deep in to the bearish zone, they are indicating that the near-term outlook continues to be bearish. We have yet another star in the weekly candlestick chart, the fourth consecutive one, implying that the short-term trend is sideways.

Market participants are likely to make the most of the intermittent holidays in the coming week to spend some of their trading profits on friends and family. Trading could be subdued in the first half of the week. With earnings season coming to an end, global events could provide direction to Indian equities. Leadership change in China and domestic industrial production numbers will be some of the key events to watch.

Sensex (18,683.6)

The Sensex recorded the high of 18,973 on Wednesday before giving up all the gains to end the week with slight loss. Since the index was unable to move strongly above the short-term hurdle at 18,854 indicated last week, it is now possible that the Sensex moves lower to 18,513 or 18,229 in the weeks ahead.

The 50-day moving average at 18,440 and the previous trough at 18,393 will make the zone around 18,400 a key support in the sessions ahead.

Strong move above 18,973 is needed to negate this view. If the index reverses higher in the early part of next week, upper targets would be 19,011 and 19,231.

The quandary regarding the medium-term trend continues. The extent of the current correction will determine if the index can move beyond 19,500 this calendar or whether it will be a subdued home run for 2012.

As discussed last week, if the decline halts around 18,200, it will imply that sideways move between 18,200 and 19,500 can follow for a month or more before the index breaks out higher. But decline below 18,200 will mean that the decline can extend to 17,800 or 17,000.

Nifty (5,686.2)

The Nifty recorded the high of 5,777 before reversing lower last week. It recorded a false break-out above the key short-term hurdle at 5,726 on Wednesday and then reversed lower. If the down-move continues early next week, the index can move lower to 5,633 or 5,545.

Short-term traders can hold their short positions with stop at 5,785. Move above this level will mean that the index can rally to 5,796 or 5,871 in the sessions ahead.

Medium-term view remains unaltered. If the correction halts above 5,500, it will mean that the index can consolidate between 5,500 and 5,800 for few more months before breaking higher. But decline below 5,500 will drag the index further to 5,296 or 5,171.

Global cues

Global equity markets closed the week a tad lower. While Greece Parliament approving its austerity budget was received with relief, the fear of President Obama increasing taxes on the wealthy and adopting an anti-rich policy kept markets edgy. This is reflected in the CBOE volatility index that stayed at elevated levels between 17 and 20.

The Dow declined sharply on Wednesday and Thursday to end with 277 points weekly loss. But despite this dive, the index is still holding above its short-term trend decider at 12,650. If the index manages a reversal above this level, it will mean that there is a possibility of a move beyond 13,700 this calendar remains open.

Gold reversing from the intra-week low at $1,672 per ounce means that the metal is not willing to go down without a fight. As discussed before, short-term supports are at $1,662 and then $1,630. The outlook will turn negative only a firm close below $1,630.

Last week’s reversal holds forth the promise of the third leg of the up-move from May low unfolding that has the medium-term targets at $1,837 and then $1,940.


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