Index Outlook: Interesting week on the cards

We have an action-packed week ahead of us in the stock market, folks. Reserve Bank Governor Raghuram Rajan and US Federal Reserve Chairman Ben Bernanke will once again move to the centre-stage to pronounce their monetary policies, mid-week. Stock prices will whipsaw depending on how the market participants read these statements.

Besides this, we have the derivative expiry scheduled on Thursday. As the long-drawn January series draws to a close the twin emotions of fear and greed that guide the market, are expected to be at their virulent best.

We had a taste of things to come last week as the Sensex and the Nifty that were merrily prancing higher in the early part of week, were yanked back rudely on Friday. The 6,350-level in the Nifty and the 21,400 level in the Sensex are turning into formidable short-term barriers for the two indices.

Trouble is brewing in the global markets too. Emerging market currencies were once again caught up in a vortex of selling towards the end of last week after the Argentinean Government withdrew support to peso, leading to its sharp devaluation. This made other emerging market currencies move lower. The Indian rupee too dived sharply lower on Friday. Oscillators in the daily chart of the Sensex and the Nifty are dipping. But they continue to feature in the positive territory implying that the short-term trend has not been affected yet.

The point of concern is the negative divergence in the weekly rate-of-change oscillator. This oscillator has dipped into the negative zone, denoting that the medium-term uptrend is losing momentum.

It was a resilient show by the Sensex last week as it closed with marginal gains. Now that it is reversing lower from 21,400 again, what will the next move be?

The week ahead: The downtrend that began on Friday can drag the Sensex lower to 21,000 or 20,902. Short-term investors can look forward to support around 20,902 since the 50-day moving average is also positioned there.

Decline below 20,900 will take the index to 20,652.

The resistances for the week will be at 21,410 and 21,484. If the monetary policy is extremely positive and indices soar higher, then the next target will be 21,572.

Medium term view: The Sensex is moving in a sideways range since November 2013. This sideways movement follows the sharp up-move from the low of 17,448. According to Elliott Wave Theory, there are two ways in which this sideways move can be viewed,

It can be a consolidation phase that can be followed by a breakout to 23,000. But we need a strong close beyond 21,600 to prove this count true.

This could be a terminal corrective move before the index plunges to 19,000 or below.

The week ahead should give us clues about which of the counts we need to take seriously.

The Nifty too reversed from the intra-week peak of 6,355.6 to end the week with a doji formation. That typically reflects indecision.

The week ahead: The weakness is expected to continue in the Nifty in the short-term. Immediate downward targets for the Nifty are 6,247 and 6,223. Traders can initiate short positions in rallies with stop- loss at 6,370.

However they should watch out for upward reversal from the zone around 6,222, where the 50-day moving average is also positioned. Target on a decline below 6,222 is 6,140.

Resistances for the short-term will be at 6,356 and 6,415. Target on a move above 6,415 is 6,469.

Medium-term trend: The medium-term trend in the Nifty too is sideways since the November-peak of 6342.9.

Since this sideways move occurs after a rally from the low of 5119, there are two ways in which this sideways move can be interpreted,

a) It can be a consolidation phase before the index breaks higher to 6590 or above. But we need a strong move above 6,420 to establish a breakout.

b) The sideways move can be a terminal corrective move before the index reverses lower to 5900 or even below. Strong close below 6,130 will be the first indication that the medium-term view is deteriorating.

What started as a placid week for the global markets turned into a rout on Friday with indices tumbling pell-mell. Most global indices closed in negative territory for the week. There are reversal patterns in many indices such as a bearish engulfing or dark-cloud cover.

CNN’s fear and greed index is showing a reading of 31 that implies that the mood in the US market has shifted to fear from greed. CBOE VIX has also jumped above 18, implying that option traders are becoming nervous, at least from the short-term perspective. But most investors in the US appear to be sanguine since the correction is long overdue in that market. There are also trend that show that there could be a shift from equity to debt taking place in the US.

The sharp sell-offs on Thursday and Friday has made the short-term trend extremely weak for the Dow Jones Industrial Average. Immediate support that needs to be watched is at 15,703. Close below this level will mean that the medium-term trend in the Dow will also come under threat. The rounding top pattern in the weekly chart of the Dow does not bode too well for the prospects of the index for the coming weeks.

Some Asian indices such as the Shanghai Composite Index, Philippines’ PSE Composite Index, Thailand’ SET and so on have managed to end the week with gains.

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