The rupee's downward spiral against the dollar held investors awestruck last week even as importers and exporters scrambled to protect their forex exposure. Rear-guard action by the RBI to stem the slide by announcing a slew of measures including increased FDI limit in retail salvaged sentiment in the later part of the week.

The sharp decline in rupee is purported to have caused FII exodus, thus denting sentiment in equity market. But it needs to be noted that despite the brouhaha over FII selling, the SEBI Web site shows net selling of only $555 million in November. These investors are, in fact, net buyers so far this year according to the SEBI. The exchanges report a higher net selling figure but this discrepancy can be partly explained by intra-day transactions of the foreign investors. Inferring that FIIs are fleeing the country based on stock exchange data can be erroneous.

Global events played their part in last week's sell-off too. Soaring bond yields in Italy and Spain, credit rating agencies downgrading Portugal, Hungary and Belgium and slowing Chinese manufacturing added to investors' growing list of worries.

The Sensex and the Nifty opened on a weak note and went on to breach their October 4 low on Wednesday, on the day prior to the expiry of November contracts. There was a wave of panic selling in that session stoked by market experts predicting doom since important support had been breached.

That may well happen, but it needs to be understood that these are long-term trend reversal signals and a one-day breach or intra-day breach has no significance in determining a break-down. A seasoned technical analyst will always place a two or three week filter to protect against false break-outs in the long-term time-frame.

Oscillators in the daily chart of the Sensex and the Nifty have reached oversold region. The weekly rate of change oscillator returning to the negative zone is, however, a cause for concern as it means a resumption of the medium-term downtrend. The long-term view has not been unduly affected by last week's move as the monthly indicators continue sideways.

Sensex (15,695.4)

The Sensex recorded the intra-week low at 15,478 before moving sideways for the rest of the week. As we have been pointing out in the previous columns, inability to clear the 17,800 hurdle means that the downward risk is great for the index. If we do simple extrapolation of the down move from the 21,108 peak, we get the next target at 14,593. Retracement of the up-move from March 2009 low gives us the next support at 50 per cent retracement that occurs at 14,577. So the area around 14,500 is where investors can expect the next halt if index continues southwards next week.

But as we have explained above, the break-down last week was a feeble one and not one to get panicky about. It is possible for the index to do another volte face and move higher to 16,400 and 17,000 in the near-term. The overwhelming pessimism among market participants should serve as a contrarian indicator.

It is obvious that the short-term downtrend has not reversed yet. Short-term rallies will face resistance at 16,145 or 16,327. Reversal from these levels can keep the Sensex between 16,200 and 15,200 for few more weeks. Next resistances will be at 16,400 and 16,814. If the index continues speeding lower, supports will be at 15,478, 15,200 and 14,700.

Nifty (4,710)

The Nifty too plunged below the 4,700 level on Wednesday but the index recovered intra-day to end the session above this mark. It moved sideways in the ensuing sessions. Though there was a lot of consternation among the trading fraternity on the Nifty breaching the previous low at 4,728, it needs to be noted that this break-down has not been strong enough. Again as mentioned above for such long-term signals, a time-filter needs to be kept to protect against false break-downs.

However, the rebound from the intra-week low has not been strong enough to signal that the worst is over in the short-term. If the index continues to slide in the days ahead, where can the next halt be? If we extrapolate the down-move from the 6,338 peak, we get the next target at 4,400. Surprisingly, the 50 per cent retracement of the up-move from March 2009 trough also occurs at 4,438. So investors can watch out for the 4,400 level if the down-move continues.

That said it is quite possible that market takes the bears by surprise and reverses higher from this level. That will mean that the sideways movement that is on since August 26 is extending in to a triangle or a double three. A swift move up to 4,930 or 5,100 can not be ruled out in that event.

For the week ahead, the Nifty will face resistance at 4,845 and 4,901. Inability to move above these levels will mean that the index can decline to 4,640, 4,620 or 4,560 in the days ahead. The most likely scenario is a movement in the range between 4,550 and 4,900 for few sessions before a stronger pull-back occurs. Strength in that up-move will determine the medium-term trajectory in the Nifty.

Global Notes

It was another tough week for global equity with most benchmarks closing in the negative zone. Surprisingly, there was no undue spike in CBOE volatility index. It remained in the range marked in the previous week between 30 and 35 implying that investors have resigned themselves to the Euro-zone troubles extending for a long time.

Most Asian indices closed in the red, but they are holding well above the lows recorded in September. The exceptions include Japan's Nikkei, India's Sensex and Nifty and the Sri Lankan All Share Index. Some Asian indices such as Philippines' PSE Composite and Thailand's SET are still holding strong in the ongoing bout of turbulence.

The Dow took a hard tumble last week, losing 564 points. It, however, stopped at the support at 11,250 indicated in this column last week. This is a key short-term support for the index. Reversal from here can pull it higher to 12,300 or 12,753 over the ensuing weeks. Conversely, a drop below 11,200 will mean that the index is heading towards its recent trough at 10,404 again.

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