Index Outlook: Doing a jig around 16,000

Sensex (16,232.5)

The Sensex began the dreaded month of October on a wobbly note. Bears made the most of the thin trading in a holiday-splattered week to pull the index below 16,000 in early part of the week. But bargain-hunting at lower levels coupled with recovery in other equity markets helped the Sensex erase a large part of the weekly loss on Friday.

It was a week in which the rating agencies were on an overdrive. Moody's downgraded SBI's financial strength rating by one notch to ‘D+' causing a stampede in the banking counters on Tuesday. Fitch went on to downgrade long-term default rating on Italy and Spain and Moody's continued its banking downgrades by pegging down 12 UK financial institutions, leading to further turbulence in European financial markets.

HSBC Markit's PMI reading showing contraction in services sector in India further dented sentiment on Tuesday dragging the Sensex to the intra-week low of 15,745. Volumes were extremely low in both the cash and derivative segments as traders took time off from a lacklustre market to participate in the ongoing festivities. Rise in index put-call ratio denotes that mood is veering towards pessimism again.

According to BSE, the FIIs were net sellers in the first three sessions while they turned net buyers on Friday. Open interest also continues to be very low. As market participants return from their holidays next week, attention will once again focus on quarterly earnings as Infosys kick-starts the official earnings season.

Short-term oscillators in the Sensex took a sharp dive in the early part of the week but recorded a mild rise towards weekend. The 10-day rate-of-change oscillator has, however, retreated in to the negative zone implying that the short-term could stay rocky. Weekly oscillators are moving sideways while monthly ones are sinking further down.

The medium-term trend for the index remains down and as long as it trades below the key resistance at 17,200, it is expected to remain volatile. A strong close above this level is required to take the index higher to 17,438 or 17,837.

The long-term trend in the Sensex continues to be up. The structural trend reversed higher in March 2009 and one leg of this rally was completed at the November peak of 21,108. We will assume that this leg of the rally is currently being corrected since November last.

The index is currently hovering around the 38.2 per cent retracement of the up-move from 8,047 to 21,108. As we have been reiterating, this is the key support from a long-term perspective and if the index manages to hold around this level, it can consolidate in the broad range between 16,000 and 21,000 for few more years before breaking higher.

However strong decline below the critical 16,000 support will bring the next retracement supports in to play that are 14,577 and 13,036. The long-term uptrend in our market will be under threat only if the index goes on to close below 13,000.

The hammer pattern in the weekly candlestick chart is positive from a short-term perspective. But rallies next week will face resistance at 16,468 and 16,638. If the index manages to get past these hurdles, it can move on to the resistance zone between 17,000 and 17,200.

Conversely, failure to move beyond 16,628 will mean that the index is readying for another dip to 15,745 or 15,453.

Nifty (4,888)

The Nifty bounced off the intra-week low of 4,728 on Thursday to end the week 55 points lower. If the week opens on a buoyant note, the index can move on to 4,917 or 5,034. Short-term traders can divest their long position on reversal from either of these levels. Such a move will mean that the index can retreat to 4,733 or 4,728 in the days ahead.

On the other hand, move above 4,917 will take the index to the key medium term resistance zone between 5,100 and 5,170. As explained earlier, the medium-term view will turn positive only on a close above this zone. Subsequent medium-term targets are 5,230 and 5,350.

Global Cues

Global markets revived slightly last week on hope that European crisis can be salvaged. Many of the critical global benchmarks are halting at key long-term supports. The recovery is however very iffy and stock prices have to cover more ground before the medium-term view for equities turns positive.

CBOE VIX retreated from the intra-week peak of 46.9 to end at 36, reflecting the improvement in investor mood. Most European markets closed higher while Asian benchmarks closed slightly lower.

Dow started the week on a shaky note with the index hitting the intra-week low of 10,404 on Tuesday.

As explained earlier, this is a key technical support for the index and the fact that the index is bouncing off this support is a positive. Short-term resistances are at 11,200 and then at 11,500. Short-term trend will turn positive only on a strong close above 11,500. Else the index can continue to vacillate between 10,400 and 11,500.

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