Index Outlook. Index Outlook: Will they sell in May and go away?

The Indian stock market is turning skittish as the general election nears its end with only two phases of polls yet to be concluded. Profit-taking ahead of the election results has already hit the market.

The benchmark indices, Sensex and Nifty, were down 1.25 per cent and 1.3 per cent respectively last week. As widely expected, the US Federal Reserve continued with its tapering and reduced its bond purchases by another $10 billion to $45 billion a month. The much better-than-expected US non-farm pay roll data and the unemployment rate falling 6.3 per cent could support the Fed's taper in the coming months. The Fed Chair, Janet Yellen, testifying before the Congress this Wednesday will be a key event to watch for signals on US interest rate hikes.

On the domestic front, India’s Manufacturing Purchasing Managers’ Index (PMI) remained unchanged at 51.3 in April.

The index had earlier dropped from 52.5 in February to 51.3 in March. The service sector PMI and the trade balance data due to be released this week will be closely watched by the market for signals on a revival in the economy.

A slowdown in the flows last month from foreign institutional investors (FIIs) remains a concern for the market. This indicates that the FIIs are turning cautious in the home-stretch to election results.

FII flows into equity nearly halved in April to $1.6 billion from $3.3 billion in March. Also, the geo-political tensions and violence in Ukraine could keep the market risk-averse in the coming weeks, restricting any sharp rallies in Sensex and Nifty.

Though both Sensex and Nifty are still range-bound, the price action on the charts reflects the inability of the indices to gain momentum. This is posing a threat of a bearish breakout from this range.

Does this signal that the market could “Sell in May and go away”? History suggests that a sell-off cannot be ruled out. Since 1999, Sensex and Nifty have always closed negative in May if there was a positive close in the same month the previous year. Both indices had recorded a positive close in May last year.

The Sensex has closed on a weak note with a break below its 21-day moving average currently at 22,540.5.

The index is expected to remain weak in the short-term.

The week ahead : Sensex can decline to test its immediate support at 22,334. A break below this level can drag the index to 22,236 which is a crucial support.

The short-term outlook would turn negative if the Sensex records a strong close below 22,236. On the other hand, reversal from 22,334 can take the index higher to test the 21-day moving average resistance.

The index would get some relief only if it decisively breaks and closes above this resistance level. The ensuing targets on such a break will be 22,680 and 22,790.

Medium-term view: The medium-term view remains positive. The index may range between 22,000 and 23,000 ahead of the general election results. The targets on a breach of 23,000 will be 23,466 and 23,702. On the other hand, declines below 22,000 can take it to 21,500 or to 21,451, which is the 50 per cent Fibonacci retracement level.

Nifty has recorded a close below its 21-day moving average, currently at 6,747. Inability to move above this level could keep the index under pressure in the coming days.

The week ahead: Nifty can dip to test its immediate support at 6,671. A break below this level can take it further lower to 6,648 this week. A strong break and close below 6,648 could turn the short-term outlook negative and drag it to 6,600.

On the other hand, if Nifty manages to bounce from 6,671, it can rise to test the 21-day moving average resistance. A strong breach of this resistance is needed to push the index higher. The targets on such a break will be 6,780 and 6,810.

Medium-term trend : The medium-term view remains positive for Nifty. The index can retain its sideways consolidation between 6,600 and 6,900 until the election results are known. The Nifty can target 7,158 if it breaches 6,900, while a break below 6,600 can target 6,512 — the 38.2 per cent Fibonacci retracement level and 6,450.

Global indices closed in the green last week. But the developments in Ukraine need to be watched. The Dow Jones Industrial Average is retaining its 16,000-16,600 sideways range. The index has closed just below the upper end of this range.

A reversal from here can take the index lower to 16,000 in the coming weeks. On the other hand, a break above 16,600 will be bullish. It will result in a rise to 17,200.

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