Market Strategy

Index outlook: Ready for the budget jamboree

Lokeshwarri S K | Updated on February 20, 2011 Published on February 19, 2011

Sensex (18,211.5)

Equity market's victory march to celebrate the end of Mubarak regime in Egypt sent the Sensex spurting 500 points higher on Monday. Bargain hunting and short-covering did the rest to give investors some respite from the sea of red that was suffusing trading screens over the past few weeks. But the mood turned sombre once more on Friday as the spectre of 2G scam reappeared to yank stock prices lower.

Volumes were brisk last week, especially on the days that market declined. The NSE derivative volume spiked to Rs 1, 90,000 crore. Index put call ratio is moving higher as traders once more veer towards shorting on rallies. Relatively lower open interest around 1, 50,000 crore however means that many traders have not yet returned after getting singed in the recent correction.

The week ahead would offer some edge-of-the-seat excitement with the February derivative series expiring on Thursday, the Railway Budget and Economic Survey scheduled for Friday and the Union Budget on February 28.

Oscillators in the daily chart have risen from deeply oversold zone to a neutral region. Weekly oscillators continue in bearish zone though there is a mild upward reversal. The inference is that though the short-term risk is mitigated slightly by last week's rally, the index needs to progress a little further to make the short-term trend positive.

Conversely, the monthly oscillators are moving down from bullish zone and are poised in the neutral zone, on the verge of moving in to negative zone. In other words, the upcoming weeks will be important in determining the long-term trajectory of the market. Sustained reversal from these levels will mean that the structural uptrend remains intact whereas decline below these levels will usher in a period of protracted correction. If the February candle on monthly chart turns out to be a hammer or a piercing pattern, it will be a positive.

The Sensex recorded the intra-week high of 18,690 that is just short of our medium-term trend decided at 18,700. This level is significant since it occurs at 38.2 per cent Fibonacci retracement of the slide from 21,108-peak. Presence of the 200-day moving average at 18,772 also adds to the significance of this resistance.

Inability to move above this resistance zone between 18,700 and 18,800 in the days ahead will keep the short-term outlook under a cloud. But move above 18,800 can take the index to 19,400 or 19,650 in the days ahead.

We are approaching one of those events, when market is at its whimsical best. Many a time major long-term turning points occur around the budget day. Investors would do well to stay away from the temptation to speculate on the forthcoming budgetary proposals or to take unduly large trading exposure ahead of the budget.

Short-term supports for the index are at 18,157, 17,827 and 17,436. If the index manages to hold above the first support, it can rally to 19,000 or 19,540 in the days ahead.

Nifty (5,458.9)

The Nifty (5,458.9) went on to the intra-week peak of 5,600 before turning tail on Friday.

As indicated in our last column, the area around 5,650 is the medium-term trend decider for this index since it occurs at 38.2 per cent retracement of the decline from the 6,338 peak.

Presence of the 200-DMA at 5,633 also adds to the significance of this level.

As long as the Nifty trades below this level, the short-term is likely to be choppy. But an emphatic close above 5,650 will take the index to 5,836 or 5,914 over the ensuing weeks. Near-term supports for the index are at 5,440, 5,350 and then 5,198. If the index manages to hold above the first support, it will imply the propensity to move to 5,688 or even 5,840 in the days ahead.

Global cues

It was another strong weekly close for the global benchmarks. Many indices in Europe and the US went on to new multi-year highs while those in emerging markets etched strong gains.

Risk appetite appears to be back with full force once again with the dollar declining and commodities and riskier equity segments moving higher.

All the three major European benchmarks – CAC, DAX and FTSE went on to close at 33-month highs.

Many Asian benchmarks that were reeling under selling pressure since January also registered small up-ticks. But it is difficult to know if this rally will sustain given China's hike in reserve requirement on Friday.

CBOE Volatility Index moved in a very narrow range between 15 and 17 last week reflecting the optimistic mood among the global investing fraternity.

As mentioned earlier a strong close below 15 will mark the beginning of yet another wave of the bull market.

Dow marked another multi-month closing high, closing at 12,391.

This index is in a parabolic up-move since December with only one negative weekly close in between.

If we extrapolate the move from March 2009 low, the first long-term target is 12,573.

The peak at 13,132 formed in May 2008 would be the next resistance.

Close below 11,800 is needed to signal the reversal of the medium-term uptrend in this index.

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