Index Outlook: New highs in New Year?

Investors straggling into their offices after the New Year bash had good news from Washington to lift their spirits. US law-makers reached a deal on Tuesday to stave off the looming fiscal crisis. The news was greeted by a thumping rally from the global stock markets. But a sense of unease remains on the delay in addressing spending cuts and increasing the US debt ceiling.

It was an otherwise dull week as the deplorable goings-on in the nation’s Capital put a pall of gloom on the country. The regulators, RBI and SEBI, kept investors occupied with various discussion papers and committee recommendations. The HSBC’s Services Purchasing Managers Index for December moving higher to 55.6 from 52.1 in the previous month boosted sentiment.

Volumes were subdued both in cash and derivatives segment. FIIs appear to have turned gung-ho on Indian equities right from the outset of the year. They were net buyers through the past week. Open interest on the NSE close to Rs 1,31,000 crore implies sufficient trading interest in the market. Put call ratio close to one however suggests that bulls and bears are evenly divided at this juncture.

Stocks will start jiving to the management-speak as the third quarter earnings season begins next week. Infosys will set off the earnings parade on Friday. The RBI’s third quarter monetary policy meet scheduled for the end of this month will also be keenly awaited by investors.

Oscillators in the daily chart are pointing northward. But the negative divergences in the daily relative strength index as well as the moving average convergence divergence indicator imply that there could be a short-term correction in the offing. Weekly oscillators continue to display strength.

The formation in the monthly candlestick chart is quite interesting. There are a series of smaller candles moving upward since October 2012. This could mean a running correction that reflects bullishness and the possibility of a sharp upward movement.

Sensex (19,784.1)

The Sensex has moved well past the long-term resistance zone between 18,800 and 19,200. This clears the path for the index to move onward towards its previous high of 21,108.

In our long-term outlook published in the Business Line edition dated December 31, 2012, we had set the long-term range for the Sensex between 15,000 and 22,000. Investors need to tread cautiously as the index approaches the higher end of its long-term trading band.

The count that we are following for the medium-term is that ongoing rally is the C wave of an irregular flat currently in motion. This wave has the targets of 19,136 and 20,432.

The short as well as the medium-term trends in the Sensex are currently up. The index is however close to short-term targets of 19,811 and 20,118. Reversal from these levels can cause a pull-back in the index. But move beyond 20,118 will take the index onward to 20,432.

Short-term supports are at 19,200 and 18,861. Medium-term trend will be threatened only on a close below 18,250.

Nifty (6,016.1)

If we consider the long-term counts in the Nifty, we are staying with the count that the C wave of the move from 4,531-low is currently in motion. This wave has the targets of 5,870 and then 6,290. The index could move on the second target if the rally manages to extend further.

As we have indicated earlier, the Nifty has key resistance around 5,950. Previous peak in August 2011 was also formed at this level. Although the index has moved above this resistance, the break-out is not too convincing. Reversal from this zone can pull the index lower to 5,650.

On the other hand, if the index continues moving higher, it can move on to 6,089, 6,122 or 6,242 in the weeks ahead. Short-term investors can hold the index with the stop loss at 5,800. Subsequent short-term support is at 5,730.

The medium-term view will turn negative only on close below 5,540.

Global cues

The deal on resolving the fiscal cliff, announced on Tuesday sent a wave of relief through global stock markets, helping most global benchmarks end the week with gains.

CBOE volatility index that was threatening to move above the short-term resistance at 22.3 reversed down sharply on Tuesday and moved to the lower end of the trading band at 13.4 by the end of the week. This implies that investors who were beginning to get jittery have turned sanguine once again.

The DJ Euro STOXX 50 moving well above the long-term resistance at 2,600 is a positive signal for the European stocks.

The Dow gained almost 500 points last week making the short-term trend higher. Immediate target is at 13,610. Break above this level will make the index rally to 14,446. The index needs to close below 12,420 to signal reversal in the short-term trend. Medium-term support for the index stays at 10,900.


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