INDEX OUTLOOK - Stocks yield to gravity

Sensex (18,561.9)

Market was buffeted by a volley of news, both overseas as well as domestic, sending stock prices helter-skelter last week. Street's disappointment with Infosys' earnings coupled with weak industrial production numbers spooked investors on Tuesday. The fall in that session was exacerbated by a sell-off in other global equity markets caused by Irish debt downgrade. The Mumbai blasts were, however, shrugged aside nonchalantly by the market, in a fitting rejoinder to the terror attack.

The Sensex ended the week marginally lower after some wild intra-day swings. The result of the much-feared bank stress test in Europe is not dire enough to impact stock prices next week. Investors would be keenly scrutinising the next tranche of earnings announcement even as they keep an eye on macro numbers ahead of the RBI's next monetary policy statement.

FIIs appeared to be in an indecisive state of mind last week, net buyers in some sessions and net sellers in others. Volumes were lacklustre in cash segment but strong in the derivative segment especially on days when market tumbled headlong. Index put-call ratio is close to 1 implying that the bull and bear camps are equal in number. Open interest this month has been at record lows.

The Sensex took a steep tumble in the first half of the week but it halted close to our first support at 18,438. Moving-average compression made by the 50 and 21-day moving averages around 18,400 also provides a good short-term support to the index. Rate of change oscillator in the daily chart has however retreated in to the negative zone indicating short-term weakness. The evening star formation in the weekly chart is also not comforting.

The point to note is the rate of change oscillator in the monthly chart has cut the zero line to move in to negative zone. This is the first time this oscillator has done so since June 2009! While this could mean a long-term trend reversal, we need to watch this indicator for few more weeks before jumping to conclusions.

As far as the medium-term view is concerned, the index is stuck in a range between 17,300 and 19,800 since February. Key support that needs to be watched now is at 18,000 (which is also a psychological support level). If this level holds over the next two weeks, the Sensex can still attempt to get to 19,800 in the second half of this year.

The index could however find it hard to move past 19,800 in the upcoming months. As long as it trades below this critical hurdle, the risk of a decline below 17,000 remains open. Medium term targets on close below 18,000 are 17,588 and then 16,635.

For the short-term, the index could move sideways with a negative bias. Downward targets for the week are 18,437, 18,326 and 18,130. Resistances will be at 18,936 and 19,132.

Nifty (5,581.1)

The Nifty declined to the intra-week low of 5,496.9 before reversing higher. Extreme short-term trend appears to have reversed lower and Nifty could trudge lower to 5,502, 5,468 or 5,402 in the days ahead. Short-term traders can play short with stop at 5,660. Move above this level will however negate the bearish view and pave the way for further rally to 5,741 or 5,831.

The medium-term view for the index remains sideways and investors need have no worry as long as the Nifty trades above 5,400. If it manages to hold above this level, the possibility of a rally to 5,950 in 2011 remains open.

On the other hand, medium-term view will deteriorate on a close below 5,400 and pave the way for decline to 5,277 or 4,992 in the months ahead.

Global Cues

Global equity markets took yet another step backward last week on worries regarding Euro zone. Threat of Standard and Poor and Moody's cutting the US Federal government's credit rating due to the ongoing skirmish between President Obama and the Republicans caused another wave of nervousness in markets towards weekend.

CBOE volatility index that is also known as the fear gauge moved to the intra-week high of 21.7 on Friday. This index needs to close the week above 28 to signal that the mood in the market has reversed to bearish.

DJ Euro STOXX 50 recorded a new yearly low last week signalling the resumption of the medium-term down-trend. Next downward target for this index is 2572.

The Dow slid to the key short-term level of 12,420 indicated last week but it has not breached this level yet.

We stay with the view that a strong break below this level can pull the index down to 12,200 or even 11,860.

Conversely another bounce from this level will pull the index higher to 12,876 or 12,940.

The dollar once again weakened against the euro and the dollar index took a sharp tumble from its intra-week high of 77.1 to end at 75, once more reiterating that the trend along all time-frames, long, medium and short remain down for this index. Gold took this opportunity to move to a new high of $1,593.

Immediate target for the yellow metal is $1,640 and then $1,745.

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