Market Strategy

Index Outlook - Freewheeling around 18,500

Lokeshwarri S. K. | Updated on July 29, 2011 Published on July 23, 2011

Sensex (18,722.3)

Market dithered with one-step-forward-one-step-backward kind of movement for most of last week. However, the flourish towards the end helped market participants go in to the weekend with smiles on their faces. Lacklustre earnings announced by companies coupled with caution ahead of the RBI's monetary policy next week made stock prices edge sideways with a negative bias and the Sensex closed the week less than 1 per cent higher.

FIIs were on the back-foot in the earlier sessions though they turned net buyers on Friday. Volumes in both cash and derivative segments were tepid in the beginning but spurted on Friday. Open interest around Rs 1,50,000 crore is not high enough to cause exaggerated fall next week ahead of the derivative expiry. Index put-call ratio denotes that traders are still tilted towards expecting the market to fall from these levels.

Expiry of July contracts as well as the Central Bank's monetary policy statement due next week is likely to keep market participants on tenterhooks. Some of the corporate behemoths lining up to announce their performance will also add colour to the proceeding.

The short-term quandary continues and this inflection point is stretching to the point of driving everyone to exasperation. The Sensex is shackled within a very narrow band between 18,450 and 18,800 over the last two weeks, sandwiched between the two main moving averages with the 200-DMA at 19,046 above and 50-DMA at 18,350 giving support.

It is therefore not surprising that the oscillators in the daily chart are appearing clueless, hanging around the neutral zone. Weekly oscillators are not of much help either since they too are poised in the neutral region, ready to break out in either direction. The deteriorating momentum in the monthly rate of change oscillator is however a cause for worry.

If we consider the conventional chart pattern of the correction from 21,108, the Sensex appears to be charting a descending triangle that can be a topping pattern. The baseline of the triangle at 17,420 needs to be strongly breached to confirm this pattern, while a strong move beyond the 19,200 level will negate it.

Last week's move has not tampered with either the short or the medium-term outlook for the index. The medium-term trend is sideways in the band between 17,300 and 19,800. The Sensex is currently poised halfway in this range. As mentioned in our last column, significant support that short-term investors should watch out for is around 18,000. Breach of this level will pave the way for decline to 17,300 or even below. On the other hand, bounce above 18,000 will mean that index could have another shy at the upper ceiling at 19,800.

From a short-term perspective, the fact that the index is holding above 18,400 is a positive signal. Rebound from these levels will take the index higher to the resistance zone between 19,000 and 19,150. Presence of the 200-DMA at this level makes it a strong hurdle. However, if the Sensex overcomes this hurdle, it can race to 19,538 or 19,811 again. Targets on a decline below 18,400 are 18,132 and then 18,008.

Nifty (5,633.9)

We have often been asked why greater space is allocated to the Sensex in this column when compared with Nifty. The answer is that since the Sensex and the Nifty track the same companies, the wave movement, patterns, oscillators etc are similar in both the charts. Therefore to avoid repetition, only the medium and short-term outlook is given under Nifty. The oscillator, pattern or e-wave analysis given under the Sensex is equally applicable to the Nifty as well.

The Nifty did not cover much ground last week either and ended the week just 52 points higher. The index finds immediate support at 5,532 and just below at 5,508 where the 50-DMA is positioned. If the index manages to hold above this level, it will be positive from a short-term perspective. The index can then head higher to 5,740 or 5,866 in the days ahead.

Traders should however close their longs on a close below 5,530 since that will imply that the index can move lower to 5,468 or even 5,404. We stay with the view investors have no cause for worry as long as the index trades above 5,400. But downward targets on breach of this support are 5,277 and 4,992.

Global Cues

Most global markets were in a listless state in the start of the week. But they picked up towards Thursday on news of the Greek bailout. DJ Euro STOXX 50 erased all the losses recorded in the previous week to end 3 per cent higher. The sustainability of this reversal will however be known only after we see the movement of this index next week. CBOE volatility index was moving lower right from the outset of the week implying ebbing investor trepidation. It closed the week at 17.5, well below Monday's peak at 21.9.

The Dow reversed from the intra-week low of 12,296 recorded on Monday and raced higher thereafter. We stay with the view that an emphatic close below 12,420 is required to make the near-term view negative. Else the index can head higher to 12,876 or 12,940. Sideways movement between 12,400 and 12,800 for few more sessions will also be positive from a short-term perspective.

Most Asian indices also jumped on Friday helping them erase the losses of the previous sessions. Jakarta Composite Index, Thailand's SET and Philippines Composite Index went on to new life-time highs. Decreasing risk-aversion and strength in the euro has sent the dollar index plummeting lower towards 74 implying that the path of least resistance for the greenback is downwards.

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