Portfolio

Index outlook: End of a tumultuous quarter

LOKESHWARRI S.K. | Updated on October 01, 2011 Published on October 01, 2011

Sensex (16,453.7)

The global equity markets that were trotting along at a sedate pace received a severe jolt last quarter. Investors were forced to reckon with the consequences of slowing economic growth and Europe's ever growing debt troubles. S&P's downgrade of US sovereign debt proved to be the final straw on market's back that sent it sprawling, face down in the dust.

There was mayhem in the financial markets across the globe with MSCI World index losing 17 per cent in the last three months. Euro zone, that is the perpetrator of this chaos, saw MSCI Europe losing 23 per cent. MSCI India too joined in the rout, slipping 20 per cent in this period.

The mood in Dalal Street was, however, much calmer last week. The bulls fought back early to help the Sensex clamber above the intra-week low of 15,800. Talks of Germany readying a bolstered package to bail-out the beleaguered Greece coupled with short-covering ahead of the derivative expiry gave a leg-up to stock prices.

The intensity of FII selling too reduced last week. Volume in the derivative segment was very high on the day of the expiry but it tapered out thereafter. Index put call ratio rose sharply on Friday denoting that puts figured largely in the positions rolled over. Open interest below Rs 1,00,000 crore reflects that traders are confused about the short-term trajectory of the market.

The festive week ahead with a holiday thrown in on Thursday is likely to see stock prices vacillating around current levels. Second quarter earnings that start trickling in and macro economic data would be closely watched.

Short-term oscillators in the Sensex chart are poised just below the neutral zone implying that the uptrend that commenced last week has to progress a little further before the near-term view turns positive. Weekly oscillators continue to be in the bearish zone and barring the relative strength index, the rest are pointing southwards.

The Sensex has recorded the third consecutive negative monthly close in September. Last time this happened was between September and November 2008. The index has thus far managed to hold its head above the 16,000 mark but the recovery is not very convincing.

As discussed in our previous columns, the area between 16,000 and 16,200 is a strong long-term support for the index. But there are a slew of supports just below including those at 15,552 and 15,330. Extrapolation of the move from 19,131 peak gives us the next target at 15,110.

In other words, the entire zone between 15,000 and 16,000 is a strong buttress.

The medium-term trend in the index is down and the fact that it is struggling to get past 17,200 implies that volatility will rule in the weeks ahead. The index needs to get past 17,200 to set off a stronger uptrend that can take it up to 17,800. The medium-term view will turn positive only if the index surpasses this level.

A short-term uptrend is currently unfolding in the index that can take it higher to 16,994, 17,200 or 17,359. Short-term investors should however tread carefully as the index nears the resistance zone between 17,000 and 17,200.

If the index fails to move beyond 16,756 in the early part of the week, it can decline to 16,185, 15,897 or 15,366 in the days ahead.

Nifty (4,943.2)

The Nifty too recovered smartly from Monday's low of 4,758 to end the week 75 points higher. A strong opening next week can take the index higher to 5,094, 5,168 and 5,200 in the upcoming sessions. The region between 5,110 and 5,170 has proved to be a strong short-term hurdle so far and short-term traders should tread carefully as the index approaches this level.

A weak start on the other hand will pull the index lower to 4,863, 4,781 or 4,624 in the near term.

We continue to reiterate that this is an important long-term support zone for the index. However the struggle for the index to get past the 5,170 mark implies that the near term will stay choppy and the index can decline below the recent trough at 4,720.

Global Cues

Global equities have ended one of the worst quarters in recent history. Unfortunately, markets' troubles are far from over and are threatening to spill over into the next quarter as well.

However, most global benchmarks ended in positive terrain last week. European indices rose on some bargain hunting and DJ Euro STOXX 50 closed the week 7.5 per cent higher.

CBOE volatility index vacillated at higher levels between 35 and 43 implying that investors were still jumpy and the slightest sign of trouble could trigger off yet another wave of panic selling.

The Dow Jones Industrial Average rose to the peak of 11,369 in line with our expectation. It however could not rally beyond that level indicating that the index could remain volatile in the band between 10,600 and 11,600 for few more weeks. As we have been reiterating, the index has significant long-term support around 10,400 and this level needs to be breached to signal that the structural uptrend is under threat. A strong move beyond 11,950 is required to signal that the short-term view is turning positive.

Gold was extremely choppy declining to the intra-week low of $1,534 on Monday only to recoup most of the loss in the same session. Interestingly, the metal has long-term support at $1,548 that occurs at 30 per cent retracement of the rally from October 2008 low. Next retracement support is at $1,447. Traders can buy in declines as long as it holds above $1,447. Such a move would imply that the long-term trend continues to be upbeat in gold and it can break out to new highs after spending some time in the consolidation band between $1,450 and $1,920.

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