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The bears scored a psychological victory over the bulls by making the Sensex close below 20,000 and the Nifty below 6,000 last week. Equity prices rose in the early part of the week helped by short covering ahead of the expiry of derivatives on Thursday and strong global markets. But sentiment turned adverse towards the weekend as the Reserve Bank of India’s Governor doused hopes of large doses of policy rate cuts citing the mounting current account deficit and high retail inflation as the reason.
GDP growth for the March quarter staying below 5 per cent, though expected, depressed the investing fraternity further. The rupee too threatened to move to a new life-time low against the greenback on Friday making the Sensex crash 455 points and the Nifty to decline 139 points.
What is particularly disconcerting is the volatility witnessed over the last three weeks. It is obvious that both the bull and the bear camps are extremely nervous at this point. While investors are rushing to book profits at every decline, thus exacerbating the fall, there is similar urgency to participate in the rally when prices rebound; causing violent swing in stock prices.
As per technical studies such whipsaws occur close to significant peaks and troughs. Since Indian benchmark indices have travelled over 20 per cent since last June low, it is best to watch your step from now on.
Derivative volumes were high ahead of the expiry day. According to SEBI, FIIs were net buyers in most sessions. Their tally for this year is already at $15 billion in equity and $4.5 billion in debt.
Key events to watch out for next week will be HCBC India’s PMI numbers and progress of the monsoon. Investors will also start worrying about the RBI’s next move in its policy meeting in June.
We had pointed out the possibility of an evening star pattern in the weekly candlestick chart of both the Sensex and the Nifty in our last column. While confirmation in the form of further decline was not received last week, we have a gravestone doji formation in both charts this week. As the name signifies, this pattern also occurs towards the end of an uptrend and signals that supply is increasing at higher levels.
Oscillators signal that the long-term trend continues to be up in the Sensex and the Nifty though the medium term trend is slightly under pressure. The same is true of the short-term trend too. It is poised in the neutral region pointing southward, but has not reversed lower yet.
Sensex (19,760.3)
The Sensex rose to the intra-week peak of 20,254 before erasing all the gains on Thursday. As far as the short-term outlook is concerned, the index can decline to the support zone around 19,564. Recent trough formed at this juncture and the presence of Fibonacci retracement support here makes it a good level from where a short-term rebound can happen. The 50-day moving average present in the vicinity at 19,616 adds to the relevance of this level.
Rebound above 19,560 can result in the index moving higher to 19,937 or 20,200 in the near term. Short-term investors need to stay wary as long as the index trades below 20,200. This level needs to be breached to clear the way for rally to 20,443.
Decline below 19,560 can result in the index extending its decline to 19,293 or 19,022. Short-term view will turn negative only on move below 19,000.
The medium-term trend in the Sensex, however, continues to be up and our view for this time-frame has not altered. Key medium term support exists at 18,144. As long as the index holds above this level, the possibility of a break higher to 21,000 remains open. This trend will turn negative only on strong move below 18,000.
Nifty (5,985.9)
The Nifty hit the intra-week high of 6,133 before reversing lower last week. The short-term trend is down in the index but it is nearing key support at 5,936. The presence of the 50-day moving average in this zone also makes it an important support. Reversal from here can take the Nifty higher to 6,050, 6,120 or 6,230 in the near term.
Conversely, decline below 5,936 can result in further decline to 5,850 or 5,760. Short-term trend will turn negative only on decline below 5,760.
The medium-term trend in the Nifty continues to be up. This trend will be threatened only on close below 5,477. As long as the index holds above this level, the possibility of break-out to 6,301 or higher remains open.
Global cues
Most global markets extended their declines last week. The European indices were the exception with the DJ Euro STOXX 50 index closing with gains.
A final-hour sell-off in the US markets on Friday caused the Dow Jones Industrial Average to close the week with 187 points loss.
This decline made traders panic sending the CBOE volatility index up to 16.3. Close above 18 is needed to signal that this index is launching a medium-term uptrend.
That will happen if the Dow continues its downward trajectory. An evening star pattern in the weekly chart of the Dow is a cause for concern. But the index will need to close below 14,300 to signal a reversal in the short-term uptrend.
Else the index will be on course to achieve its next medium-term target of 15,677.
Rupee watch
The rupee tumbling 1.6 per cent also added to the trepidation last week. The Indian currency has lost 5 per cent since the beginning of this month and is placed close to its life-time low at 57.3.
This is the immediate support to watch. Reversal from here will pull the rupee back to 53 or 51.
Break of this level will imply that the down-move from July 2011 peak at 43.8 has resumed.
Minimum target in this event would be 61.9.
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