INDEX OUTLOOK: Turning from a road-block

The market's jaunty march continued in the early part of last week. The Sensex went on to the intra-week high of 18,523 while the Nifty flirted with the 5,600 mark. But its progress was impeded by stock prices suddenly going in to a tailspin on Wednesday afternoon. The main reason for this reversal was traders rushing to unwind their long positions ahead of expiry.

Slight easing in other global equity markets and continued rally in crude prices were other factors that applied downward pressure on stock prices. FIIs continued to plough money in to Indian equity even as other investors are beginning to worry about the sustainability of this rally.

Worries on depleting interest in Indian IPO market faded with the thumping response to MCX public offer. The massive oversubscription is positive on two counts. One, it shows that good offers can still elicit good response which is good from capital raising point of view. Two, it shows that there is money waiting on the sidelines, waiting to move in to equity market.

Cash volume continued to be robust. Derivative volume also spiked higher last week. NSE derivative volumes crossed Rs 2, 00,000 crore twice last week around the expiry period. Put call ratio has also declined to reasonable level. Open interest has declined below Rs 100,000 crore on Friday implying that many shorts would have let their positions expire without rolling it any further.

Oscillators in daily chart pulled back strongly from overbought zone indicating that a short-term correction is currently in progress. We have a ‘harami' pattern in the weekly chart of the Sensex and the Nifty. Before the Hindi speaking populace start spluttering at the word, let me explain that it is is a two-candlestick pattern that denotes that a short-term correction is in offing.

Sensex (17,923.6)

The much-awaited correction finally kicked off in the Sensex last week. It reversed lower below the key long-term resistance at 18,826. As we have been reiterating, this was the medium-term target for the Sensex. Since it has already moved just 2 per cent short of this level, investors need to tread warily.

Inability to move beyond 18,826 will imply that the index can pull back to 17,200 or 16,400 in the months ahead. On the other hand, strong break above this level will pave the way for the index moving towards a new high.

Our preferred view however is that the index retracts a little more from these levels to 17,513 or 17,322. It can then spend the weeks in the run-up to the Budget vacillating between 17,300 and 18,800. The budget is then likely to provide direction to the medium-term trend. Since the Government finances leave little hope by way of major sops to companies or market, the Sensex could move lower to 16,800 or 16,400 if the Budget turns out to be unsavoury.

For the near-term, the decline could continue to take the index lower to 17,513 or 17,322. Presence of the 200-day moving average near the second support also makes it an important cushion.

Near-term resistances will be at 18,280, 18,523 and 18,894. Failure to move beyond the first resistance will denote impending near-term weakness.

The Nifty (5,429.3) moved close to our medium-term target to touch the intra-week peak of 5,630. The action of the index over the next few weeks will determine the medium-term trajectory. As explained earlier, sharp move beyond this level will pave the way for rally towards its life-time peak. Conversely decline from here can cause a decline to 5,200 or 4,960 in the months ahead.

Our preferred view is that the index moves a little lower, perhaps to 5,317 or 5,231. Then a sideways consolidation between 5,200 and 5,650 can follow in the run-up to the budget. The proposals in this document are then likely to determine if the index breaks below this band or moves higher.

For the near term, the downward targets are 5,340 and 5,320. Traders can watch out for reversal from this zone. Target on a move below 5,320 is 5,231. The 200 DMA at 5,170 will be the next support.

Short-term resistances are at 5,550, 5,630 and 5,648. Traders can initiate fresh shorts if the index fails to move above the first hurdle.

Global indices

Global markets stayed at higher levels but some vestige of doubt appears to be creeping in, making indices record star or doji formations in the weekly candlestick chart. CBOE VIX closed near the lower end of its current band, implying that the events of the weeks gone by left investors feeling sanguine.

The Greek bailout appears to have satisfied investors and they are looking for the next trigger to take equity prices higher. DJ Euro STOXX closed at 2523, a level that is 50 per cent retracement of its decline from February 2011 peak. Investors need to watch this index over the upcoming weeks as it can lose steam from here.

Dow crossed the 13,000-mark briefly before closing at 12,983. The index has moved beyond the May 2011 peak at 12,876 and is managing to hold above it. As mentioned last week, sharp move beyond 13,000 can take the index higher to 14,363 and 16,976 over rest of this year. Key support that needs to hold in the upcoming months is at 12,000.

Most Asian markets closed in the red last week as profit booking set in. But the Philippines Composite Index continues to dazzle with its sharp move higher. The index closed at a new life-time high of 4,893 last week.

NYMEX Light crude futures moving above $104 per barrel is a cause for concern. This is a critical long-term resistance. But last time the rally halted slightly above at $115. Targets for this move are $115 and then $125. As long as the crude futures sustain above $95, the up-move is likely to continue.

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