Index Outlook: Scintillating October for global stocks

The stock market treated investors to a generous display of pyrotechnics in the Diwali week with various stocks blazing higher, helping Sensex gain more than 1,000 points and Nifty over 300 points. There was plenty to spur stocks forward last week, the RBI's hint that policy rate hike cycle could be drawing to an end, a tentative deal reached mid-week to solve Euro-zone's troubles, stronger than expected third quarter GDP growth in the US and so on. Festive cheer and bear squeeze also had a part to play in Friday's rally.

It has been a very benign October for stock markets this year. In the monthly candlestick chart, we are going to see the first green candle (positive close) since June this year. What is more, it is a bullish engulfing candle and could turn out to be a morning star also if there is another green candle next month. These signal a potential trend reversal.

Muhurat day trading was nothing to write home about with benchmarks closing marginally higher in that session. Volumes were strong prior to the Diwali break, but tapered off thereafter. The derivative volume was especially very low on Friday when stocks zoomed up, probably reflecting the scepticism among the trading fraternity who are predominantly short. FIIs however net bought Rs 2,166 crore worth of stocks in that session.

The next batch of quarterly earnings will keep investors occupied next week. Domestic market will also look towards rest of the world for direction. After what was a trail-blazing week, global markets could retract next week and that can affect domestic stock prices too.

The weekly oscillators in the charts of the Sensex and the Nifty cut across in the bullish zone last week implying that the medium-term trend could be turning positive. Daily oscillators moved further in to positive zone. Monthly oscillators however, continue in the negative zone.

Sensex (17,804.8)

Investors returning after an extended Diwali break will be faced with a new quandary. Is it alright to buy now after the stellar move last week? We had been giving break-out targets of 17,448 and 17,845 over the past weeks. Both were achieved last week.

The index has now reached a formidable resistance zone. 38.2 per cent retracement of the down-move from 21,108 peak gives us the target of 17,800. The 200-day moving average is placed just above at 18,050.

Again, extrapolation of the move from October 4 trough also gives us the first target at 18,176. So the zone between 17,800 and 18,200 is critical from a medium-term perspective. Here are a few guideposts to help you navigate the weeks ahead:

Reversal from the above-mentioned zone will pull the index down to 17,089, 16836 or 16,583. The bulls will be in command as long as the index holds 17,000 and bears will wrest control on decline below 16,500.

If the rally continues past 18,200, subsequent targets are 18,460 and 19,066. The medium-term trend will remain iffy as long as the index trades below 19,066. Move above can open the possibility of a shy at a new high.

On the flip-side , failure to move beyond 18,200 will mean that the index can remain in the band between 15,700 and 18,200 for few more months with the possibility of another decline below 15,700.

In other words, the index is at a critical junction from a medium-term perspective. The action next week should give us further clues about the future trajectory.

In the week ahead, the Sensex can move up to 18,050 or 18,176. If the rally persists, next target would be 18,500. Supports for the week would be at 17466, 17,322 and 17,199.

Nifty (5,360.7)

The Nifty too surged past the 5,170 barrier to achieve our short-term targets at 5,230 or 5,350. But as we have been reiterating over the past few weeks, 5,350 is critical from a medium-term perspective and this trend will turn positive only if the index gets emphatically past this level.

If the index manages to continue surging next week, then it can go on to 5,536, 5,633 or 5,735 in the medium term. The area around 5,700 is however a very strong long-term resistance and the index is likely to find it difficult to get past this hurdle.

On the other hand, if the index reverses lower and fails to move past 5,400 in the upcoming sessions, it will mean an impending decline to 5,198, 5,143 or 4,985. Traders can continue to buy in declines as long as the index trades above 5,143. The short-term view will turn negative only on a close below 4,985.

In the week ahead, Nifty could pause and retract to 5,268, 5,228 or 5,185. Traders can hold their long positions as long as the index trades above the first support. Target on a break above 5,400 is 5,536.

Global Cues

October has not been such a bad month for stock market this year. The Dow is up 12 per cent this month and the DJ Euro STOXX 50 is up 13 per cent. Both European and the US stocks bounced sharply last week as the resolution reached on Euro-zone's $1.4 trillion rescue fund last week appeared to have greater substance than former decisions of this kind. Stocks also rallied on US GDP growing at 2.5 per cent in the third quarter, faster than the 1.3 and 0.4 per cent growth recorded in the previous two quarters.

Stock markets in other regions also made healthy progress. CBOE volatility index declined below the support at 28 that we have been watching over the past weeks to close at 24. As explained earlier, this denotes a shift in investor sentiment from pessimism to optimism in the near term.

Dow broke above the key short-term resistance at 12,000 indicated last week. What is more important is that both Dow and S&P 500 have closed above their 200-day moving averages. As explained earlier, if Dow sustains above 12,000 next week, it will mean that the bulls have wrested control once again and a rally to 12,750 or 12,876 will then be possible. Supports that need to be watched in the short term are at 11,970 and 11,650.

The dollar index that has become a good indicator of the level of risk aversion in financial markets dipped below key level at 76 on Thursday. This means money can start flowing out of dollar assets in to commodity, equity and so on.

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