Index outlook: Investors pussyfooting at higher levels

Stocks appeared to be curled up in a cosy snooze last week. There was hardly any movement in the frontline stocks. The Sensex and the Nifty dragged themselves sideways to close marginally lower. The positive takeaway from last week’s movement is that the Sensex is holding above 19,000 and the Nifty continues above 5,800.

It was probably the sudden flurry of activity in the primary market with three IPOs and one offer for sale that dragged investors away from the secondary market. Economic data sent out mixed signals. Not much satisfaction can be derived from the sharp increase in October industrial production numbers since it is mainly due to the low base last year. While consumer price inflation continued to be high, there was slight moderation in the Wholesale Price Inflation.

Other global markets are also in a somnolent mood with investors busy obsessing over the ongoing discussions between President Obama and the US law makers over the tax hikes and spending cuts set to come into force from January 1.

The RBI will take centre-stage again next week as it unveils its monetary policy. Market participants will spend the early part of the week cogitating about another rate cut. The passage on banking laws amendment bill and the insurance bill will also affect the market mood. Japanese elections scheduled for this weekend will also be of interest to investors.

The Sensex and the Nifty are moving sideways in a narrow range over the last two weeks. This has caused a sharp deterioration in the short-term momentum. Short-term oscillators are beginning to signal a sell. Weekly oscillators are displaying negative divergence but are still trending up. This implies that further decline from these levels will reverse the positive weekly trend.

Sensex (19,317.2)

The Sensex slid lower to the intra-week low of 19,197 before staging a mild recovery towards the end of last week. This decline has not really dented the short-term uptrend. But the rounding top formation over the last couple of weeks means that the uptrend is losing momentum.

Short-term supports for the Sensex are at 19,169 and then 19,097. The index is halting at the first support. Reversal from here can take the index higher to 19,457 or 19,612 in the near term. Target on a strong break above 19,600 is 20,035.

The medium-term trend remains upward. But strong breach of the 19,000 level will mean that it can move down to 18,707 or 18,452 in the weeks ahead. The index can then be expected to spend a few more weeks in the band between 18,500 and 19,500 before moving higher.

The medium-term trend will be in jeopardy only on close below 18,450. Subsequent supports are at 18,110 and then 17,740.

Nifty (5,879.6)

The Nifty too declined to the intra-week low of 5,839 before reversing on Friday.

The recovery can take the index to 5,918 in the early part of the week. Inability to move beyond this level will be the cue for short term traders to play short with stop at 5,940. Downward targets would be 5,840 and 5,806.

If the index manages to move above 5,965, next target is at 6,096.

The medium-term trend in the Nifty continues to be up. But we are expecting a correction from these levels since five-wave formation from 5,032 low appears to be complete.

If a medium-term correction kicks in, it can drag the Nifty down to 5,685 or 5,600 in the months ahead.

The Nifty can then form a broad range between 5,600 and 5,950 for few months before attempting to move beyond 6,000.

Global cues

Most global indices hung on to the gains recorded in the previous week. CBOE volatility index continued to move sideways between 15 and 17. This index is near its long-term lows implying that US investors are still in a bullish mood.

The DJ Euro STOXX 50 closed above the March 2012 highs.

This is positive. But the index is now just below the key medium-term resistance at 2,650.

This level needs to be surpassed for the index to move on towards 2,840 or even 3,080.

The Dow moved to the intra-week high of 13,329 before reversing lower. That the index is declining from the short-term resistance around 13,200 implies that the near-term outlook is negative and the index can fall to 13,000 or 12,800 in the weeks ahead.

This view will be negated on move above 13,329, paving the way for rally towards the recent peak at 13,662.

Most Asian benchmarks had a strong week. Shanghai Composite Index managed to gain 4.2 per cent due to strong manufacturing growth in China.

This index however needs to close above 2,500 to indicate that it is on the path to recovery.

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