Technical Analysis

Index Outlook: Sailing into uncharted waters

Lokeshwarri S K | Updated on November 19, 2014 Published on June 08, 2014

Onset of a pre-Budget rally has taken both the Sensex and the Nifty to record highs

The bulls were on a rampage in the Indian stock market last week, lifting the Sensex and the Nifty 5 per cent higher. Both the indices scaled new life-time highs as well. The chase after small- and mid-cap stocks was even more boisterous, resulting in the benchmark indices in these two segments surging more than 7 per cent.

With less than a month to go for the Union Budget for FY 2015, the pre-Budget rally appears to have kick-started already. The ease with which stocks — both large as well as small — surged last week underlines the inherent demand for stocks in the market.

With the Sensex just slightly above the psychological level of 25,000 and the Nifty barely over the 7,500 hump, some caution is needed. But the boost given by the European Central Bank and the positive trends in other global indices charts imply that Indian stocks could get unstoppable from this point if the rally continues this week.

There was a lot going for the market last week. The cut in the statutory liquidity ratio by the Reserve Bank of India in its monetary policy gave rise to the expectation that company earnings will improve once funds availability becomes easier. Reports of monsoon progressing well and the rate cut by the ECB were other positives that helped lift the indices in the later part of the week. Open interest in the derivative contracts on NSE climbing above ₹1,78,000 crore implies that trading interest is rising in the market. Volumes in the cash segment are hitting record levels, implying increase in retail participation in the market.

Oscillators in the daily chart are moving higher after a decline to test the neutral zone. Weekly oscillators continue to be positive and are trending higher, indicating a positive medium-term view. It is the monthly oscillators that display the most promise. The MACD-line in the monthly chart is rising sharply from the zero line. The monthly relative strength index is featuring in the bullish zone at 75. The monthly rate of change is also perking up and beginning to move higher.

Sensex (25,396.4)

It was up, up and away for the Sensex as the index managed to gain 1,179 points last week.

The week ahead: The index has reached the upper end of its current trading range between 24,000 and 25,500. Sensex can now move in either of these two trajectories:

If it continues to move higher, it can rise to 26,009 or 26,469.

If the index fails to make any headway from this level, it can decline to 24,657 or 24,268 in the days ahead.

The short-term view stays positive as long as the index trades above 24,657.

The medium-term: The Sensex is poised at the critical medium-term resistance of 25,106. Investors need to tread a little cautiously till it makes a clean move beyond 25,500.

Medium term target above 25,500 is 26,227 and then 27,140. Key medium-term support for the index is at 23,500.

Nifty (7,583.4)

The Nifty too is poised at a new life-time high.

The week ahead: The gap formed on Friday remains open and traders can stay long as long as the Nifty trades above 7,474, the floor of this gap. Some caution is needed since the index is placed just at the upper end of its trading range. The movement this week can be along these trajectories,

If the index continues surging higher, it can move to 7,726 or 7,952 in the days ahead.

Reversal in the early part of the week can pull the index lower to 7,400, 7,300 or 7,100.

Traders can buy in declines with stop at 7,400.

The medium term: The medium-term view for the Nifty stays positive. But as indicated earlier, the area around 7,500 is a strong resistance zone. Wait for a strong move above 7,600 before you can rest easy.

Subsequent medium-term target is 8,071. Key medium term support exists at 6,940.

Global cues

Most global indices managed to close the week on a strong note. The ECB’s decision to slash rates took European benchmarks such as the CAC, DAX and the FTSE to new record levels. The stocks in beleaguered European nations such as Greece and Spain also managed to record sharp gains. The EURO STOXX 50 index has launched into a fresh leg of a long-term uptrend that can take this index to its 2008-high again.

The Dow has also broken out of an upward sloping trend channel to close at a record high last week. This could be followed by further up-move in the index that takes it higher to 17,200. Move beyond this level will set the next target at 18,364. The medium-term outlook for the Dow will be marred only on a close below 16,000.

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