Index Outlook - Week of volatility ahead

The RBI is taking a cautious stance by keeping interest rates steady but now transferring focus on growth, kept markets volatile and exploring new triggers.

Narendra Modi’s third successive victory in Gujarat elections provided some mid-week cheer, pushing the benchmarks once again to this year’s high. However, all eyes turned towards the US, as concern over the US budget standoff pulled Indian markets lower along with profit-taking. The encouraging factor from the previous week is that the Sensex continues to trade above 19,000 and the Nifty has stayed above 5,800.

On Friday, US stocks ended lower as the Republican plan to avoid the ‘fiscal cliff’ failed to gain ample support, extinguishing hopes that a deal would be reached before 2013. Nevertheless, the US indexes still finished higher for the week.

The setback in the US budget talks also pushed the euro lower, while gold prices dropped to near a four-month low, frightening gold in the yellow metal.

Moreover, rupee falling below the 55-mark against the dollar capped the markets’ climb.

FIIs continued their buying spree in the previous week. Both the Sensex and the Nifty have been consolidating sideways in a narrow range in the past three weeks. But the recent fall has deteriorated the short-term momentum.

The short-term indicators and oscillators have signalled a sell. Though the weekly oscillators are still trending up, it is displaying negative divergence implying that any further fall will alter the positive weekly trend. Apart from mounting concern over the US budget, markets remaining closed on December 25 on account of Christmas, and final derivatives expiry of the year occurring on Thursday, will all lead to a volatile week ahead.

Sensex (19,242)

The Sensex rallied to an intra-week high of 19,520, almost close to this year’s high of 19,612 before reversing down and declining 75 points for the week. This fall is a further detriment to the short-term uptrend.

Another rounding top formation in the previous week implies that the short-term uptrend is losing momentum. Immediate key supports are at 19,000, 18,900 and 18,800. The daily indicators have entered the negative territory and relative strength index has fallen into the neutral region from the bullish zone. The daily oscillator has signalled a sell. Short-term resistances for the index are at 19,450 and then 19,612. Inability to rally above the first resistance will pull the index down to 19,000 and then to 18,800 in the short-term.

On the other hand, a strong jump above 19,600 can take the index higher to 20,035 in the ensuing weeks.

Medium-term trend continues to be up for the index.

However, a decisive fall below the 19,000 mark will imply that the index can decline to 18,800 or 18,450. In that scenario, the index can consolidate sideways in the band between 18,500 and 19,500 before breaking higher.

Only a strong fall below 18,450 will threaten the medium-term uptrend. Next key supports are at 18,110 and 17,740 levels. Witnessing selling pressure and profit-taking, the Nifty (5,847.7) fell by 31 points in the previous week. Failure to rally above the significant resistance at 5,930 will signify bearish momentum and short-term traders can initiate short position with stop-loss at 5,940.

Targets are 5,800 and 5,750 levels. But a strong up move beyond 5,965 will reinforce bullish momentum and take the index higher to 6,100 levels.

An emphatic decline below 5,700 will indicate medium-term trend is losing momentum and the Nifty can decline to 5,600 in the ensuing months. The Nifty can trend sideways in the band between 5,600 and 5,950.

Global cues

The Dow rallied to an intra-week high of 13,365.8 before making a U-turn. However, the index managed to close 55 points higher at 13,190.8. It is testing key resistance at around 13,200.

Near-term outlook is bearish for the index and it can decline to 13,000 or to 12,800 levels in the ensuing weeks. Conversely, strong rally beyond 13,330 can push the index northwards to 13,662 levels.

Gold fell more than 2 per cent or $38 per ounce last week, breaching a key support at $1,680 to close at $1,656.8. It is in a medium-term decline since peaking out in early October 2012 at $1,795.

Gold is hovering just above its key long-term support band between $1,600 and $1,620.

A decisive downward breakthrough of this support can drag gold down to $1,550 levels in the medium-term. Significant resistances are positioned at $1,680 and then at $1,700.

Light crude oil advanced 2.3 per cent in the midst of volatility to end at $88.6 a barrel last week.

Since early November, it has been in a sideways consolidation in wide range between $85 and $90.

A strong breakthrough in either direction of the aforesaid range will determine the medium-term trend.

Key resistances above $90 are at $93 and $95. Supports below $85 are at $82 and $80.

>yoganand.d@thehindu.co.in

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