Technical Analysis

Index Outlook: Another tumultuous week

Lokeshwarri S K | Updated on August 31, 2011 Published on August 13, 2011

Sensex (16,839.6)

It was a near-apocalyptic state in financial markets on Monday. Investors watched panic stricken as global benchmarks shattered through critical support levels even as voices proclaiming an impending double-dip recession grew louder. But the optimistic trait that is typical of the human race soon surfaced, helping stocks claw back over the rest of the week.

Rear-guard action by the Federal Reserve and some European exchanges, though the rationality and justification of the later is open to debate, also helped assuage the sentiment. Our markets will continue to watch the developments in the US and Europe and take cues from them in the truncated week ahead.

Though the Sensex plummeted to the low of 16,432 on Tuesday, it closed the session at 16,857 and spent rest of the week in a stable range between 16,800 and 17,250. Volumes too were high in the first two sessions as the selling pressure intensified, but it tapered off in the second half of the week. FIIs led the selling brigade on Monday and Tuesday, net selling Rs 3,400 crore in these sessions.

Oscillators in the daily chart have reached oversold region but they have not signalled a buy yet. The 10-month rate of change oscillator has moved deep in to the negative region. This level was last seen in July 2008. Relative strength index in the monthly chart has also moved in to bearish zone, implying deteriorating long-term view. Weekly oscillators are also positioned in the negative zone in line with the current medium-term downtrend.

The cut in the Sensex from the November peak is milder compared with its peers in Europe and Americas if we take the retracement of the rally from 2009 low into account. As explained last week, minimum retracement that is 38.2 per cent of the up-move from 8,047 trough gives us the target of 16,118.

A halt in the zone between 16,000 and 16,118 will keep the bull market that began in March 2009 alive and kicking. It will also signal that the inherent strength in the Indian markets is stronger than other global markets. The Sensex can then establish a trading zone between 16,000 and 21,000 for a couple of years or so before breaking above 21,000.

That is the optimistic scenario and there is a strong likelihood of it playing out given the relative strength of India and other emerging Asian countries against the backdrop of slowing growth in developed economies. But in the unlikely event of the index heading below 16,000, subsequent retracement supports fall at 13,924 and 13,036.

The short-term trend is still under a cloud. The Sensex could move lower to 16,619, 16,432 or 16,224 in the days ahead. Halt at any of these levels will make the index move in the range between Rs 16,200 and 17,400 for few more sessions as the index whipsaws while forming a bottom. Target on a breach of 16,224 is 15,771.

Short-term trend will turn positive only on a strong close above 17,420. Subsequent targets for the index are 17,690 and 18,000.

Nifty (5,072.9)

Nifty declined to the intra-week low of 4,946 before ending the week 138 points lower. The doji pattern in the weekly chart is interesting as it points towards slacking momentum. As explained before, if we consider the Fibonacci retracement of the uptrend from 2,539 trough, we get the immediate support at 4,885. As explained last week, the entire zone between 4,750 and 4,900 is a significant long-term support for the index.

If the bull-market that is in force over the last two years has to survive, then the index needs to hold above this band. Sideways move between 4,750 and 6,300 can then follow for a couple of years more before the index breaks out higher. However, a strong close below 4,750 will mean that the recovery can be more long-drawn since the index could then decline to 4,248 or 3,989 before a rebound.

The short-term trend in the index continues to be down. It can decline to 5,011, 4,946 or 4,895 in the upcoming sessions. Recovery from either of these levels can result in the index spending few more sessions between 4,900 and 5,250. Traders can initiate fresh long positions only if the index closes above 5,250. Subsequent targets will be at 5,326 and 5,417.

Global Cues

Global equity markets began the week with a resounding crash on Monday. But things stabilised thereafter helping most benchmarks recoup some losses to end with not-so-deep-cuts.

CBOE Volatility Index spiked to the intra-week high of 48, the level last seen in May 2010. The level of 43 is also a significant long-term resistance and close above this level is needed to signal that the downtrend will accelerate and panic will elevate.

Leading European benchmarks such as CAC, DAX and FTSE retraced between 50 to 61.8 per cent of their prior long-term up move last week. DJ Euro STOXX 50 was one of the worst affected indices since it moved below its critical long-term support at 2,262 mid-week. It however managed a close above this level eventually. It now needs to be seen if the index sustains above 2,262 for couple of weeks more to gauge the long-term trajectory in this index. Some of Asian markets such as Indonesia, Korea, and Thailand gave up some gains though they have put up a relatively stronger show in the correction so far.

The action in the Dow mimicked that of a headless-chicken last week, down 600 points in one session, up 500 points in the next and so on. It moved below the first long-term support indicated last week to hit the intra-week low at 10,604. Key long-term support in the vicinity is at 10,429. It is however worth noting that S&P 500 has retraced to the corresponding support at 1,100 last week. A dark hole will however open up if these critical supports are breached. Short-term resistances will be at 11,427 and 12,000.

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