Index Outlook: Treasure hunt in ruins

Investors could be going through the motion next week as an arduous year grinds to an end. There was some relief in the last three sessions as stock prices pulled back from the brink, yet again. A spot of bargain hunting along with drop in food inflation and Moody's upgrading India's local-debt rating helped this rally.

Sensex ended the week almost 250 points higher after threatening to shatter the 15,000 bastion at one point. Volumes in cash segment fell to levels not witnessed in recent times. Derivative volume was, however, good as traders made the most of market volatility. Index put-call ratio has also fallen below 1 implying that the shorts have covered their positions.

Action centred on derivatives can pick up next week as the December contracts roll into expiry. But the low open interest around Rs 1,30,000 crore rules out any major swing in the week ahead. That many market participants could be away next week on a hard-earned break could also result in subdued action next week. It is time investors started foraging among the ruins of stock prices for potential treasures. Even if prices decline from these levels, it should be an opportunity for long-term investors to pick stocks at valuations that are seen only once in two to three years.

Oscillators in the daily chart have reversed upward after last week's rise but they continue in the bearish region. Oscillators in the weekly and monthly chart have not been affected by last week's movement. The 10-week rate of change oscillator is moving sideways since last February.

Sensex (15,738.7)

Sensex opened on a weak note last week with a dive below the 15,500 mark. But it reversed from the low of 15,135 on Tuesday and a short-term rally is currently in motion. Immediate resistances for the week ahead are at 15,864 and then 16,302. Since the index is poised just around the first resistance, a pull-back is likely that makes it move sideways between 15,500 and 16,000 next week.

Supports for the week will be available at 15,627 and 15,447. Breach of the second support will result in a re-test of the recent low at 15,135.

The medium-term view for the Sensex continues to be down and it is not yet certain if the fresh leg of the down-move that began on December 7 is complete yet. Inability to move above 16,000 next week will mean that the short-term risk of a plunge below 15,000 in the upcoming weeks remains open. The zone between 17,500 and 18,000 needs to be overcome before the medium-term view in the index can turn positive.

Nifty (4,714)

The Nifty too moved below the 4,600 mark to record the low at 4,531 last week. The rally that began from this low faces resistance at 4,750 and 4,881. Since the index is positioned at the first resistance, it is possible that it reverses down from here to decline to 4,678 or 4,625 in the last week of this year. A sideways move between 4,625 and 4,750 is then possible. Traders can hold their long positions only as long as the second support holds. Decline below this level will make a re-test of the recent low at 4,531 possible.

If Nifty moves higher early next week, it can go on to 4,812 or 4,881. Move above the second resistance is needed to make the near-term view positive for the index.

The medium-term trend in Nifty continues to be down and it is not yet certain if the wave from 5,099 peak is complete. Failure to move beyond 4,800 will mean that the risk of a slide to 4,450 or 4,350 in the weeks ahead remains open.

Global indices stopped their slide and moved slightly higher as festive cheer took over. Concerns over Europe persisted with Italian 10-year bond yields rising to 7 per cent. But stronger-than-expected reading on US consumer durable sales, unemployment, etc., helped sentiment towards weekend.

That investors are feeling more sanguine is reflected in the CBOE volatility index declining well below the critical 28 level that we have been watching over the past weeks. This index closed at 20.7 denoting that investor mood is veering towards the optimistic.

That is not surprising since Dow closed at the highest level in the last five months. This index has closed above the critical short-term resistance at 12,250.

As indicated in our previous columns, this index can now attempt to move on to 12,600 or 12,876 in the weeks ahead. Close below 11,600 is needed to reverse the positive near-term view for this index.

The dollar index is halting after recording a high of 80.9. The doji star pattern in the weekly candlestick chart means that the medium-term uptrend from August low can halt at these levels. The index faces strong resistance around these levels since it is the half-way mark for the decline from June 2010 peak.

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