Index Outlook: As going gets tough; the bulls get going

Bulls who were in retreat, turned around and put up a valiant fight last week. Recovery in global sentiments, revival of hopes of domestic interest rate cut and announcements of infrastructure spending by the Prime Minister helped lift the mood as well as stock prices. The Sensex closed 750 points higher while the Nifty surged 226 points.

Global policy makers put up a concerted effort through monetary action and some pep talk to pull equity markets back from the brink. China cut interest rate, European Central Bank held rates steady and Ben Bernanke announced that the Federal Reserve was ready to act, if needed. This coupled with hints that ‘Operation Twist' wherein the Federal Reserve could invest proceeds from its assets into Treasury market was being contemplated, gave a booster dose to sagging equity prices.

There are a series of major events lined up in the next couple of weeks that could keep investors on tenterhooks. The RBI monetary policy on June 18 and Greece election scheduled on June 17 will be critical for financial markets. IIP numbers, progress of monsoons and advance tax numbers are other sidelights that will keep investors preoccupied.

The Sensex has formed a bullish engulfing pattern in the weekly candlestick chart that is a relief following three weeks of sideways movement. Momentum indicators in the daily chart are beginning to move higher and are just emerging out of the bearish zone. Higher trough formed in the monthly relative strength index is also a positive.

Sensex (16,718.9)

The Sensex recovered from the intra-week low of 15,748 to close 6 per cent above this level. That said the index is now poised just below its 50 and 200 day moving averages, both of which are converging at 16,790.

The index is also currently drawing close to the short-term resistance at 16,808 where the 38.2 per cent retracement of the prior decline is present. Inability to move past this level will mean that the index can decline further in the near-term to 16,385 or 16,137. Investors can remain sanguine about near-term prospects as long as the index trades above 16,137.

Decline below this level will mean that the index could head towards 15,748 or 15,135 again.

If the Sensex continues its upward march, the targets will be 17,135 and then 17,463.

To recapitulate the long-term view – Sensex is in long-term downtrend since the 21,108 peak formed in November 2010. Third leg of this move appears to have resumed from the 18,523 peak. This leg could once again end around the December trough at 15,135. A higher bottom around 16,000 is also possible. Such an event will reflect strength in the index.

There is a strong long-term support between 14,800 and 15,000 that should be able to support the index even if the down-move exacerbates. Investors need to panic only when it moves below 14,800.

The Nifty (5,068.3) too did a brilliant turnaround from the intra-week low at 4,770. It is currently close to its 50 as well as 200 day moving averages. Presence of Fibonacci retracement resistance at 5,098 also makes current level a significant obstacle. Traders should therefore watch their step in the near term. Fresh trading longs are recommended only on a strong close above 5,100. Subsequent targets would be 5,200 and 5,301.

But reversal from the current levels will drag the index down to 4,964 and 4,890. Traders should not initiate fresh long positions on decline below 4,890. That will imply that the long-term downtrend has resumed. Downward target will then extend to 4,771 and 4,531.

The long-term trend in the index is down. The third leg of the downtrend from 6,338 peak appears to have resumed from the February peak. First long-term target for this leg of the down-move falls at 4,512. In other words the index could attempt to form a long-term low around the previous low at 4,555.

A higher bottom around 4,800 will, on the other hand, denote strength and the possibility of the index moving beyond 5,600 over the medium-term.

Global Cues

Global indices recovered slightly last week. But the turnaround was not very strong. Many indices are treading the water at lower levels for the last four weeks. CBOE volatility index declined from the critical resistance at 27 implying that the medium-term trend in the US market has not turned lower yet and investor sentiment was slightly more confident last week.

The recovery in Dow was however quite spectacular. It reversed from the intra-week low of 12,035 to close 435 points higher. The bullish engulfing pattern in the weekly candlestick chart is also encouraging. Immediate supports for the index continue to be at 11,943 and 11,625. The index needs to close below 11,600 to indicate a reversal in the near term view.

The dollar index also paused last week but it is also holding at key hurdle at 82.8. It needs to decline below 80 to indicate that the worst is over for the near term.

lokeshwarri_sk@thehindu.co.in

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