Index outlook: Stocks take a breather

The rally wobbled slightly last week as investors decided to take some money off the table. The Government continued to feed the market titbit reforms to keep the mood upbeat but investors seem to have grown tired of this façade. Doubts regarding the passage of many of these bills in Parliament also led to a tempering of the enthusiasm.

Declining exports and widening trade deficit, weak industrial production numbers and rating agency Standard and Poor threatening to downgrade India’s credit rating added to the air of caution, resulting in both the Sensex and the Nifty closing the week with losses.

Volumes were strong in both the cash as well as derivative segment. Index put call ratio has declined below 1 implying that traders have closed their short positions in this correction. Open interest , however, moved above Rs 1,50,000 crore reflecting growing trading interest. FIIs were going a little slow with their secondary market purchase last week but they have managed to buy $2 billion worth of equity so far in October.

Fractal geometry seen in behaviour of stock market participants is an interesting facet for analysis. Every rally begins with an overdose of pessimism and ends with a burst of optimism. This behaviour is common whether the rally is four years long or four months long, only the intensity of emotions varies according to the degree of the trend. The resurgence in stock market cheer observed over the last month restates this trend.

The gush of second quarter earnings will keep market participants riveted in the week ahead. Headline inflation data and the RBI’s next monetary policy meeting scheduled for October 30 will be other discussion points next week.

Sensex (18,675.2)

The Sensex opened the week on a wobbly note and went on to close with a 263 points loss. A bearish engulfing candlestick pattern is seen in the weekly chart of the Sensex. But though the short-term trend has reversed lower, the medium-term trend has not yet been affected in the index. Oscillators in the daily chart are also hovering in the neutral region implying that it is not yet time to throw in the towel.

The medium-term view remains unaltered. The index has neared critical long-term resistance band between 18,800 and 19,150. A convergence on wave targets makes this a powerful hurdle from where the index can retract to 17,855 or 17,000. The extent of this correction will determine the medium-term trajectory in the index.

If the correction halts at the first target (17,855), it will imply that the index will attempt to move towards 20,000 again after consolidation in the zone between 17,800 and 19,000 for few more weeks.

On the other hand, decline to the 17,000 support will mean that the index has already achieved its yearly peak at 19,137. Medium-term target on move beyond 19,150 remains at 19,600.

The index can move lower to 18,428 or 18,291 in the week ahead. The 18,000 zone will be the key support that investors need to watch out for. Close below this level will cause a severe dent in the prevailing sentiment. Short-term resistances for the index will be at 18,933 and 19,137.

The Nifty (5,676) too closed the week 71 points lower making the short-term outlook negative. The index could decline to 5,614 or 5,546 in the short-term. Traders can play short as long as the index trades below 5,746. Next short-term resistance would be at 5,815. Targets on a strong move beyond this peak would be 5,870 and 5,920.

The Nifty is in a short-term decline but the medium-term view remains positive. However, as we have been reiterating, the zone between 5,800 and 5,870 is an important long-term resistance zone for the index. Decline from this zone can pull the index down to 5,420 or 5,180 over the medium-term.

Halt around the first support at 5,420 will be ideal from a medium-term perspective.

Global cues

It was a sedate week for the global equity markets. Most benchmarks recorded minor rallies or declines. CBOE Volatility Index closed 1.8 points higher but it is near its long-term lows reflecting complacency among investors. The DJ Euro STOXX 50 index that represents European stocks is declining from key resistance at 2,600. Close below 2,400 will mean that the medium-term trend could be reversing lower.

The Dow had a forgettable week with the index closing lower in all the sessions. The index is, however, halting at our first short-term support at 13,240. Reversal from here will keep the short-term trend up and pave the way for rally to 13,700 or 13,784 again. We stay with the view that close below 13,000 is required to reverse the medium-term trend.

> lokeshwarri.sk@thehindu.co.in

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