Index outlook: Looking for a foothold

Sensex (17,305.8)

There was a stampede in the US and European stock markets last week as investors rushed towards the exit door gripped by fear of yet another crisis triggered by the massive debt piled by these countries. Numbers indicating slowdown in economic growth in these regions stoked the panic further causing the Dow to lose 6 per cent while many European benchmarks ended over 10 per cent lower for the week.

Stocks in other regions were not spared as growing risk aversion made the sell-off spread across the globe. Indian stocks were pummelled right from the outset of the week. But the selling intensified on Friday; the floor seemed to have caved in at one point when the Sensex was down around 700 points. Thankfully, sanity returned and aided by some short-covering, the index recovered from an intra-day low of 16,990.

It is no secret that it was the FII fraternity that pulled the rug from under the market's feet. They net-sold Rs 1,800 crore on Friday and their net selling tally last week was to the tune of Rs 3,000 crore. F&O volumes crossed Rs 2 lakh crore on Friday when the selling frenzy was at its peak. Surprisingly, the index put call ratio went up on Friday, indicating that many longs could have been stopped out in that session.

Open interest is extremely low around Rs 1,20,000 crore. Such low positions in the derivative segment means that there may be no danger of the fall exacerbating due to margin pressures from traders, who are holding futures and options.

The reaction of stocks, bond market and the dollar to the downgrade of US debt by Standard and Poor early next week will set the tone for trading for rest of the week. Many believe that the move might not have too great an impact on stocks since they are already emerging from a steep sell-off. Again this downgrade has been expected for over a month now and could already have been priced in the stocks. That the other two credit rating agencies, Fitch and Moody's retain the AAA rating is also a positive aspect.

Last week's movement that made the Sensex shatter the 18,000 support has taken oscillators in the daily chart deep in to the oversold region. The weekly and monthly oscillator dipping in to negative zone is however a cause for worry since it indicates reversal in medium-term trend for the index.

Despite its brief foray below the 17,000 mark, the Sensex closed the week at the medium-term floor of 17,300. It is obvious from the charts of most other global indices that the entire rally from 2009 lows is currently being retraced. If we consider the Fibonacci retracement of the corresponding up-move in the Sensex, we get the long-term supports at 17,189 and 16,118. The second support occurs at 38.2 per cent retracement of the up-move from March 2009 and could act as a strong support if the going gets rougher from this point.

It is now clear that the C wave down from the 21,108 is currently unfolding. This wave has the targets of 17,452 and 15,955. Again we arrive at the area around 16,000 as a critical long-term support.

If we drill down one level lower, the targets of the down-move from 19,811 fall at 17,588 and 16,635.

To sum up the medium-term outlook, the Sensex is holding at the floor of its medium-term trading range. A rebound is possible from here since oscillators are deeply oversold. But if this support breaks, investors ought to watch out for support at 16,635 first and then at the area around 16,000.

The hammer formation in the daily chart is a positive sign and any short-term bounce in the index can take it higher to 17,700 and then 18,000. Both these are strong short-term resistances and reversal from either of them can cause further decline to 16,990 or 16,635. Strong close above 18,100 is needed to signal reversal in the medium-term outlook for the index.

The Nifty (5,211.2) hit an intra-week low of 5,116 before ending 271 points lower for the week. The index crashed through the short-term support at 5,400 on Thursday and even declined below our medium-term target of 5,196. As explained above, most global indices are retracing the entire up-move from the lows made in the first quarter of 2009. If we consider the corresponding retracement in the Nifty, it occurs at 5,196 and then 4,885. The Nifty has already achieved the first target and further deterioration can pull it lower towards the second. Long-term outlook for the index will turn negative only if the index closes below 4,885.

If we consider the e-wave target for the C wave from the peak of 6,335, it occurs at 5,228 and then 4,786. This means that the band between 4,750 and 4,900 should act as a good support band in the weeks ahead for the index. The May 2010 trough at 4,786 also reinforces the significance of this band.

In the week ahead, the Nifty will face resistance at 5,240 and 5,323. The ceiling of the downward gap formed on Friday at 5,323 will act as a strong hurdle and move above this level is needed before traders can initiate fresh long positions. Failure to move above this level will keep the index moving in the band between 5,300 and 5,100.

If Nifty begins the week with a wobble, it will decline to 5,116 and then to 5,004.

Global Cues

Most global indices tumbled headlong last week in one of the worst weekly falls since the nightmarish months of 2008. The CBOE VIX, also called the investor's fear gauge spiked to 39.2 on Friday and closed at 13-month high.

This index needs to stay below 35 to indicate that nervousness among the trading fraternity is abating.

DJ Euro STOXX 50 has given up more that half the gains recorded since 2009 implying that there is possibility of the downtrend from 2007 peak resuming.

This index has also closed below its May 2010 low, turning the medium-term outlook to negative from neutral.

European benchmarks such as CAC (11 per cent), DAX (13 per cent), FTSE (10 per cent) were among the worst hit. Greece General Share Index fell to 14-year low. Asian indices were, however, quite resilient.

Some indices such as KLSE Composite, Shanghai Composite and Philippines Composite lost less than 3 per cent last week.

It was a no holds barred week for the Dow as it crashed below 11,860 to record the intra-week low of 11,139. Long-term supports for the Dow occur at 10,954 and 10,429.

If the weakness persists following the US debt downgrade, these levels should act as a buttress for the index. Key resistance that investors need to watch over the next week lies between 11,800 and 11,900. Once this band is crossed, the index will be on its way to recovery.

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