Index Outlook: Pausing at a roadblock

Sensex (18,486.4)

Pranabda gratified market participants by presenting a benign, please-all budget that did not rock the fragile market further. Once it was known that there were no drastic changes in taxes, traders started scrambling to square short positions making the Sensex surge over 1,000 points higher in the post-budget sessions.

A tiny recovery in other emerging markets, some conducive domestic economic readings and bargain hunting at lower levels also aided the market recovery. The speed with which the brouhaha over the Union Budget died down this year reflects the declining influence of this event in shaping market trajectory. With crude prices on a boil and continuing strife in Libya, market is likely to find it a struggle to lunge forward in the weeks ahead.

Monthly oscillators recovered slightly after last week's rally. But as mentioned earlier, these oscillators are poised in the neutral zone on the brink of moving in to negative region that would portend the onset of a prolonged down-trend. The spinning top candle for the month of February also implies indecision and the possibility of a move in either direction. Movement of the index over the next few weeks could decide the long-term trajectory in the index.

The Sensex moved in a narrow range between 17,300 and 18,700 in February. Since this move follows the sharp decline in the month of January, the medium-term trend in the index remains down. The selling pressure observed every time the index approaches 18,700 is also a cause for worry since it means that there could be another leg of the down-move yet to unfold. Targets for such a move are 17,243, 16,600 and 16,300.

A strong close beyond 18,700 would, on the other hand, pave the way for a rally to 19,392 or 19,655 in the weeks ahead. In such a scenario, the index can move between 17,000 and 20,000 in the upcoming months.

The most important factor in favour of the Indian market at this juncture is that the decline from November has been greater in magnitude that most other markets. As pointed before, the index has almost retraced 30 per cent of the entire rally from the March 2009 lows already. It can, therefore, be hoped that we could be closer to the bottom than most other markets.

It is also seen that developed markets have just launched in to a correction. As the down-move progresses in these markets, funds can find their way back to India and other emerging markets.

The ifs and buts seem endless at this stage. It will suffice for investors to watch out for the resistance around 18,700 and the support at 17,300. Medium-term support zone below 17,300 is between 16,000 and 16,300.

The Sensex is near the key medium-term resistance level at 18,700. Immediate supports are at 18,253 and 17,954. Pause at either of these levels will mean that the index will make an attempt to get past the 19,000 zone in the short-term. Resistances for the week are at 18,737, 18,835 and 19,200. Since the 200-day moving average is present at the second resistance, close above that level will be a psychological victory for the bull camp.

Nifty (5,538.7)

The relief rally that followed after the Budget presentation took Nifty to 5,608 on Friday. As mentioned earlier, the zone between 5,600 and 5,650 is a key medium-term resistance for the index and traders can cash in their long positions on a wobble around these levels. Close above 5,600 will take the index to 5,760 or 5,900 over the medium-term. As far as the wave counts of the fall from 6,338 is concerned, the sideways move recorded since February between 5,200 and 5,600 appears to be a pause or a corrective rally before the down-move continues. Targets for such a move are 5,165, 4,970 and 4,891.

Next retracement support of the rally from March 2009 low also occurs at 4,886. In other words, if there is a sharp fall below 5,177, investors can watch out for the support zone between 4,750 and 4,900.

For the short-term, the resistance around 5,600 will continue to thwart rallies. Short-term targets on a move above this level are 5,654 and 5,760. Presence of 200-day moving average at 5,650 will also act as a strong hindrance. Supports for the week would be at 5,464 and 5,376.

Global Cues

Most global benchmarks moved sideways as inflation and searing crude oil prices dominated the proceeding. The VIX vacillated in a broad range between 18 and 21 as investors seemed undecided about the direction the markets would take next.

European markets stabilised at lower levels following the sell-off in the previous week. The movement in these indices for the next couple of weeks needs to be seen to gauge if the current correction is short-term term or medium-term in nature.

The Dow held above the 12,000 level and closed on a flat note just 39 point higher. We stay with the view that this index needs to close emphatically below 11,800 to signal the onset of a serious correction.

A rebound from current levels can take the index higher to the medium-term target of 12,573.

Most Asian markets recorded a positive weekly close though the medium-term down trend that began in January continues to be in force. The dollar has been steadily losing ground against other currencies. Dollar index that captures the movement of dollar against a basket of currencies is down 3.6 per cent this year.

This weakness in dollar is causing commodity prices including that of gold and crude to shoot higher.

Gold closed at new life-time peak of $1,428. The metal faces a hump at these levels, but close above $1,430 will give the next short-term target at $1,474. Nymex crude is pausing at the key resistance at $105. As mentioned earlier, close above this level would give the next target at $119.

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