The clouds that were stretched as far as the eyes could see towards the end of last week have dispersed somewhat, spreading some sunshine in the forex and equity market. It is the recovery in the rupee that rallied from the intra-week low of 68.6 to gain 5 per cent that was the primary cause for this cheer.

But it is quite likely that the clouds have not scattered for good but have only retreated to reassemble at a later date.

The sentiment in the forex market got a boost from the optimistic note and the liberal stance taken by the new RBI Governor, Raghuram Rajan, in his inaugural speech. But the rupee, equity and bond market’s bugbear – the FOMC meeting scheduled on September 18 – is not yet done.

Nervousness is expected to increase in the run-up to this event and the US 10-year treasury yield has already increased to 3 per cent.

The other problem confronting market these days – Syria and crude oil prices — has been relegated to the background. But the last word has not been written on this yet. Domestic macro data is not too comforting either with the HSBC Purchasing Managers’ Index (PMI) slipping to 47.6 in August, the lowest recorded since April 2009.

The truncated week ahead could see the onset of some volatility as Brent crude nears critical resistance level. Break above $118 will once again roil the outlook in rupee. The industrial production data and consumer price inflation data will also do their part to influence market mood.

Oscillators in the daily chart have reached overbought zone. The Sensex has moved close to its long-term 200 day moving average while the Nifty is testing its 50-day moving average.

Oscillators in the weekly chart have reached the mid-point or the neutral zone but the indices need to move a little further before the medium-term outlook improves.

Sensex (19,270)

The Sensex hit the intra-week low of 18,166 before pulling back to end the week 650 points higher. If the index had reversed lower before crossing above 18,700, it would have meant that a devastating third wave was in the offing.

But the index managed to rally to the intra-week high of 19,293 by Friday. Though the mood has improved considerably, the short-term outlook remains negative.

Investors need to watch their step in the early part of next week as the Sensex is poised at the 61.8 per cent retracement of the decline from 20,351-peak.

The short-term trajectory can be thus,

Sensex can reverse lower on Tuesday to move to 18,600 or 18,167. Rebound from either of these levels will mean that the index can head towards 20,000 soon.

Decline below 18,167 will mean that the downtrend has resumed that can drag the index to 17,400 or below.

Move above 19,500 will mean that the index is heading towards its medium-term ceiling between 20,200 and 20,500.

The long-term view on the index will not be threatened as long as it trades above 17,200. It is only on a breach of this level that the lower targets of 16,598 or 15,748 come into play.

Nifty (5,680.4)

The extremely bearish view that emerged towards the end of last week has mitigated. But it has not reversed. The rally to 5,688 implies that the risk of an immediate collapse to 4,887 and 4,515 is not present.

But investors still need to tread cautiously as the index is poised just below the critical Fibonacci resistance level at 5,720.

If the index wobbles around this level, it will mean that the outlook remains under a cloud. The routes that the Nifty can take in the week ahead and its implications are as follows,

If the index reverses from the 5,700 to 5,750 resistance, it can move down to 5,470 or 5,338.

A rebound from either of these levels will mean that the index can move higher towards 6,000 over the medium-term.

Decline below 5,338 will mean that the downtrend that commenced from the 6,093 peak has resumed that can drag the index down to 5,120 or even below.

Strong move above 5,750 is needed to make the short-term view positive again. Subsequent targets are 5,780 or 5,840.

Global Cues

There was slight improvement in the global benchmarks last week, with many of them closing with marginal gains.

The US markets were range-bound last week. Improving car sales, the highest since 2007, and improvement in home sales, boosted the sentiment.

The Dow tested the 15,000 level on Friday and closed with 112-points gain. The index is managing to hold above the support at 14,500.

As mentioned earlier, the medium-term trend will reverse lower only on a close below 14,500. Next target for the index is 13,700.

There could be a pull-back in the Dow over the next week that takes it higher to 15,100 or even 15,300. Inability to move above the first resistance will mean that the index will resume its slide soon.

Along with India, benchmarks in many other emerging markets such as Hong Kong, Mexico, Russia, Korea, Taiwan and Thailand also managed to end the week with gains.

US Treasury yields spike

The yield on 10-year Treasury notes of US breached 3 per cent for the first time in two years, before ending the week at 2.93 per cent. The yield could strengthen further in the next couple of weeks as the FOMC meeting, in which the tapering of bond repurchase is going to be announced, nears. Lower demand for bonds from Fed will push down the prices of these instruments, thus making yields move higher. This is not good for Indian bonds. Higher yields on US fixed income instruments will make US-based investors invest in those instruments as opposed to bonds in countries such as ours, where the yield on 10-year G-Sec is 8.4 per cent.

But if the currency depreciation is deducted from the yield, the returns will turn negative. That means the run on Indian bonds and the currency can resume, which, in turn, can affect stock prices too.

> lokeshwarri.sk@thehindu.co.in

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