Technical Analysis

INDEX OUTLOOK - The tough get going

Lokeshwarri S K | Updated on December 03, 2011 Published on December 03, 2011

Indian equity market cocked a snook at its detractors and reversed smartly, higher last week. Both the Sensex and the Nifty closed 7 per cent higher. The impetus was provided by the concerted effort of the central banks of US, Eurozone, Japan, Canada and Switzerland to provide additional liquidity to the global financial system.

This caused a tidal wave of buying in European and American equities that resulted in benchmarks in these countries close over 4 per cent higher on Wednesday. The Sensex and Nifty used this wave of optimism to pull away from the brink. China's move to ease liquidity by lowering reserve ratios held by banks also cheered investors.

Domestic macro-economic data released last week was however bad with decline in September quarter GDP, slowing exports and decline in PMI reading. Bargain hunting in front-line stocks coupled with a bout of short-covering towards weekend helped stocks shrug off these numbers.

Volumes were lacklustre in the first half of the week but it rose in the later part. FIIs too turned net buyers in the last two sessions. Put-call ratio continues to be high showing the bearish tilt in trading preference. Open interest is, however, still quite low around Rs 1,00,000 crore implying that traders are not yet confident about the trend in the market.

November has made up for the peaceful and blood-free October by shaving off 9 per cent from both the Nifty and the Sensex. The 10-month rate of change oscillator is displaying a positive divergence since August indicating that the current down-move lacks momentum. This indicator shows a reading of -5 which means it is on the verge of reversing higher. The weekly rate-of-change indicator has already moved in to positive zone implying a reversal in medium-term trend.

Higher trough made by this indicator is also a bullish signal. Another bullish takeaway from last week's trading is that both the Sensex and the Nifty managed a close above the 21 and 50-day moving-average compression.

Sensex (16,846.8)

With the recovery registered last week, the risk of an imminent collapse to 14,500 has been mitigated. It is also to be noted that the Sensex has bounced off its 40-week simple moving average that is a critical long term support.

If we step back and view the Sensex' movement shorn of the drama that accompanied the move below 15,700, the index is moving sideways in he band between 15,500 and 18,000 over the last three months.

There are two ways in which this move can be viewed.

It can be the terminal correction from where the index forms a long-term trough to move higher.

The other possibility is that this is a halt before the index takes another dive below 15,500 to the supports we have mentioned in our earlier columns – 14,577 or 13,036.

The rally that began last week has not progressed sufficiently to enable us to form an opinion on which of the two counts will play out.

The Sensex will have to move past the resistance zone between 17,800 and 18,000 to indicate that the medium-term view is turning positive. The presence of the 200-day moving average in that region makes it a strong medium-term barrier.

For the week ahead, the Sensex will face resistance around 17,000. Inability to move past this level can drag the index lower to 16,349 and 16,017. The open gap between 16,200 and 16,400 will act as a good support for the index in the days ahead. If it manages to hold above 16,349 it will portend a move higher in the upcoming weeks.

Nifty (5,050)

The Nifty too is moving in a wide sideways band since August that can turn out to be a final corrective before a sustainable reversal or a pause before yet another plunge.

Downward targets in case the index moves strongly below 4,700 are 4,400 and 4,000. On the other hand, the index needs to move above the resistance zone between 5,300 and 5,400 to make the medium-term trend positive.

For the week ahead, immediate resistance would be at 5,109. If the index fails to get past this resistance, it can decline to 4,920 or 4,820 in the upcoming sessions.

Traders can buy in declines as long as the index trades above the first support (4,920). Since there is an open gap between 4,850 and 4,920, traders can look to this area to buttress any down-move.

Short-term targets on a move above 5,100 are 5,180 and 5,311.

Global markets had a more stable week despite continuing rumblings in Europe. Most benchmarks managed to close the week with strong gains.

For the Dow, it was the strongest weekly gain since July 2009 as it went on to close 7 per cent higher. The CBOE volatility index dropped around 20 per cent as risk aversion ebbed.

It is the European markets that led the recovery last week. THE DJ Euro STOXX index closed 11 per cent higher led by strong surge in most European benchmarks including the CAC and the DAX.

The Dow moved in line with our expectation, reversing higher from the support at 11,250 to record 788 points increase for the week.

As explained last week, such a move implies that the short-term trend remains up in the index. It can now move higher to 12,284 or 12,753 in the upcoming sessions.

The short-term view will get roiled only if the index goes on to close below 11,230. Drop below this level will bring the long-term support at 10,400 in to reckoning.

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