Index outlook: Investors seek fresh pastures

Equity markets were buffeted by a bout of turbulence caused by the fear that the Federal Reserve could hike interest rates sooner than expected.

The Sensex and the Nifty too slid lower in the later part of the week. The surging dollar is further stoking the nervousness.

We will have more of Fed-watching next week too. Global investors will remain edgy till the completion of the FOMC meeting on Wednesday.

This is likely to cap movement of the Sensex and the Nifty in the early part of next week.

A close vigil is likely to be maintained on the impact of the Fed decision on FPI flows and the rupee.

But with the movement in large-caps getting constrained, the party has now shifted to the small- and mid-cap space. The BSE Small Cap index gained over 5 per cent while the Mid-Cap index gained more than 3 per cent.

That investors who did not participate in the rally so far are beginning to return is evident in the frenzy witnessed in the primary market.

The Sharada Cropchem offer was oversubscribed 60 times. Snowman Logistics has listed with 68 per cent gains on day-1, reinforcing the idea that IPOs now offer the route to make a quick buck.

We are beginning to see many veterans shake their heads at this mad rush since these are signs of an overheated market.

While we don’t think that this is the end of the bull market, a sudden sharp and swift correction could be around the corner that removes some of this speculative froth from the market.

Open interest on NSE’s derivative segment has crossed ₹2,00,000 crore, implying that speculative positions are beginning to pile up.

But the put-call ratio in Nifty futures is close to 1, implying that traders are equally divided over the direction in which the market will move in the near future.

Sensex (27,061) The Sensex took one more step higher to 27,355 in the early part of the week, but it could not make any headway and ended the week just 34 points higher.

The week ahead : We have a doji formation in the weekly chart. This implies an ambivalent short-term view.

Short-term supports for the Sensex are at 26,529 and 26,000. Short-term traders can play long as long as the index trades above 26,000.

Targets on a break above 27,354 are 27,436 and 27,831.

Medium-term trend : The break above 27,000 is a positive for the Sensex. But it is currently threatening to move below it.

There is a significant medium-term target at 27,400. So investors have to tread carefully till the index gets past this level.

But once it does, it will move on to 28,400. Key medium-term support for the Sensex is at 24,500.

Medium-term view will turn negative only on a close below this level.

A sideways consolidation can make the index move between 24,500 and 27,500 for a few months.

Nifty (8,105.5) The Nifty too has closed on a tentative note, after four gung-ho weeks.

The week ahead : The index can move in either direction next week, so be prepared for some whipsaws. Immediate support exists at 7,944. Next support is at 7,787.

Traders can buy in declines as long as the index trades above the first support.

The short-term trend will be threatened only on a close below 7,787. That will mean that the index is moving lower to 7,422.

A strong start to the week can see the index moving higher to 8,253 or 8,375.

Medium-term trend : The medium-term trend for Nifty stays bullish. It is possible that the index is charting the fifth wave from the low of 5118. This wave has the initial targets of 8,149 and 8,526.

The index is pausing just below the first target. So some caution is required.

We have other wave targets also culminating in the zone between 8,000 and 8,500. If the index reverses lower from this band, we could see it move in the zone between 7,000 and 8,500 for a few months. The medium-term view will, however, turn bleak only on a close below 7,000.

Global cues Many global indices reversed and recorded losses last week. Emerging market indices in Brazil, Mexico, Taiwan and Russia moved lower. But indices in China, India and Japan have managed to close with mild gains.

The Dow closed 150 points lower, the first decline after five consecutive weekly gains. Immediate support lies at 16,676. The short-term trend will, however, reverse only on a close below 16,334. The continuing strength in the dollar is causing this turbulence. Immediate resistance for this index is 85. But a break above 85 can take the index to 89.

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