Index Outlook: Bears on the prowl again

Sensex (18,518.8)

Stock prices jumped off the precipice last week driving home the fact that this correction cannot be wished away just yet. Surprisingly, it was not the violent end of Osama bin Laden but the higher than expected policy rate hike that scuttled stock prices. Traders had to grapple with sliding commodity prices as well in the later part of the week as silver, gold, crude et al went in to a free fall.

Volumes were tepid despite heightened intra-day volatility. FIIs remained net sellers in all the sessions; they have pulled out almost Rs 3,600 crore from the secondary market last week. Action in derivative segment was also lacklustre with open interest hovering around Rs 1,25,000 crore. PCR falling below 1 also implies that market is getting oversold and traders are not building fresh derivative positions.

The WPI and IIP data due next week will be of great interest to investors as they try to gauge the likely impact of these on future policy decisions. The results of Assembly elections will also vie for investor attention along with the earnings announcements by the stragglers.

The Sensex closed 617 points or 3 per cent lower last week. While this decline is not deep enough to cause concern, the fact that it cut sharply through the 19,000 support has altered the short and medium-term view significantly. In E-wave analysis, it is always difficult to figure out a sideways pattern (flat, triangle, double-three and so on) while it is evolving. There were two possible medium-term trajectories that we had been juggling with over the past weeks,

If the Sensex moves above 19,800, it would then move close to its life-time high again and the index will spend the rest of the calendar in a higher trading range between 17,000 and 21,000.

The other count was that the index fails to move past 19,800. In this case, the C wave down from 21,108 can pull the index down to 17,761 or 16,493 over the ensuing months.

Last week's move makes the second count more likely. Since the March trough of 17,792 occurred around the first target, investors can watch out for a rebound around this level. Next medium-term support is around 17,300 that is the February trough.

There is likely to be a pullback in the near term. The first hurdle for this pullback will be between 18,700 and 18,800. The 50-DMA is also present in this zone. Inability to move above this zone will mean that the index will dredge lower to the zone around 17,850 in the upcoming weeks.

If the index gets past 18,800, the next resistance zone lies between 19,100 and 19,200 where the 200 DMA is positioned. A strong close above this level is required to signal that the index is on its way higher. Short-term supports are at 18,160, 17,920 and 17,792.

Nifty (5,551.4)

Nifty collapsed below the support at 5,716 last Tuesday and then went on to breach our outer short-term target too at 5,575. It is now fairly certain that the third leg of the correction that commenced at the November peak of 6,338 is currently in progress. As we have been reiterating in our past columns, this wave has the targets of 5,332 or 4,954. Since the March trough of 5,348 occurs close to the first target, investors can watch out for some respite in this region.

As we have been explaining over the past weeks, failure to move above 5,960 will shift the trading range for rest of this calendar lower.

The index is, however, oversold in the near-term and a bounce is possible in the upcoming sessions. First resistance band for this rebound is around 5,630, where the 50-day moving average is also positioned. Traders can use a reversal from this zone to initiate fresh short positions. Downward targets would then be 5,350.

Rally above 5,630 can take the index to the zone around 5,750 where the 200-day moving average is also present. The negative short-term outlook will be mitigated only on a strong close above 5,750.

Global Cues

It was a turbulent week in the global equity markets. Weakness in Euro on lowered expectation of ECB rate hike sent dollar higher that, in turn, caused sharp decline in commodity prices.

Silver ended its spectacular rally at $49.8/troy ounce to decline 27 per cent last week. It is poised at $35 that is 61.8 per cent retracement of its previous up move. Even if the entire up move from October 2008 is considered, the metal has strong support between $34 and $35. Silver bulls can expect some support at current levels. If unabated selling continues, subsequent targets would be $29 and $24.

Nymex crude futures too tumbled sharply by 15 per cent. A three-wave move from the last quarter of 2009 could be complete in crude oil and the prices could now decline to around $85 over the ensuing months giving a much-needed respite to policymakers. The decline in gold was, however, less dramatic and it is still holding above the short-term support at $1,415.

The Dow retracted slightly to close 172 points lower. But as long as the index holds above 12,500, the short-term view will not be under threat. The CBOE volatility index was however sharply higher indicating the nervousness among traders regarding repercussions to the Osama killing. Many of the Asian benchmarks too appear to have begun a medium-term downtrend.

COMMENT NOW