Technical Analysis

Index Outlook: Another Black October?

Lokeshwarri SK | Updated on March 12, 2018 Published on October 11, 2014

Correction has commenced in the global markets. With indices perched at record highs, there is room for further downside

October — the most dreaded month in stock markets — is here. And so is the much-awaited correction.

Stocks in most global markets moved lower last week, with indices in the US and Europe losing 2-5 per cent. Indian stocks too moved lower in tandem.

The reasons for the decline are not far to seek. The US Federal Reserve is all set to end its quantitative easing programme by the end of this month.

That is going to suck out much of the liquidity that has fed the stock market rally since 2009. Yes, Japan and Europe are continuing their easy money policy but the absence of the US in this group will be felt.

The breathless rally in the US and other developed markets has resulted in stretched valuations. With interest rates in the US set to climb mid-2015, stocks are going to be impacted by the shift of money to US treasury securities.

A slowdown in Europe and China and the continuing geo-political tensions are other worries that can weigh down stocks.

Back home, with the earning season set to start, investors cannot duck the fact that corporate earnings are not growing fast enough to justify the rally in their stock prices. Tension on the Indo-Pak border also put pressure on Indian stocks.

The silver lining amid all this gloom is the fall in crude prices and the surprisingly good earnings of Infosys.

Both the Sensex and the Nifty closed below their 21-day moving averages last week. The indices moving below their recent low recorded on September 26 is a sign of weakness.

Oscillators in the daily chart are reflecting this weak trend. The moving average convergence divergence oscillator in the daily chart has moved into the negative zone. Other momentum indicators are also ruling in the oversold territory.

The medium-term trend is also beginning to crack. This is evident in the weekly momentum indicators giving a sell signal. However, these indicators have not yet moved into the bearish zone. That needs to happen to confirm the onset of a sustained medium-term downtrend.

The good news is that the monthly trend looks quite healthy in both the Sensex and the Nifty. There was a doji formation in September and a red candle so far in October. But there is no threat to the robust long-term outlook yet.

Sensex (26,297.4)

Short-term pattern in the Sensex is appearing quite weak.

The week ahead: The movement in the index since September 26 appears to be an irregular flat that could be the second wave of the fall from the peak of 27,354. Investors need to watch out for the resistance at 26,700.

Inability to break above this level will mean that the index can move lower to 25,987 and then 25,554.

A strong move above 26,898 is needed to make the short-term outlook positive.

Medium-term trend: The medium-term trend in the Sensex is positive. But the index is poised just above a critical support at 26,000. A close below this level will accelerate the downtrend and can pull the index to 25,232 or even lower.

But we stay with the key medium-term trend deciding level at 24,000. Investors with a long-term horizon need not panic as long as the index trades above this level.

Nifty (7,859.9)

It was a down-up-down movement for the Nifty last week. This kind of wavering implies that the index can head lower in the near term.

The week ahead: The Nifty is poised just above the key support at 7,790. A close below this level will confirm the onset of the next leg of the down-move from the 8,180 peak.

The movement in the Nifty since September 26 appears to be an irregular flat that is the B wave. Targets of the next wave downward are 7,766 and 7,639. Traders can go short in rallies with stop loss at 8,030.

The short-term outlook will improve only on a strong move above this level.

Medium-term trend: The medium-term outlook for the Nifty stays positive. A close below 7,800 will place this view under threat.

Key medium-term support is, however, placed at 7,000.

Global cues

It was a virtual rout in many global markets last week. Indices such as the CAC, Canada’s TSX Composite Index, DAX, FTSE and the Dow Jones Industrial Average took a deep cut last week. Investor fear peaked with the CBOE Volatility Index spiking to 22, the highest level hit since January 2013.

The Dow showed the first sign of weakness this calendar, dipping below the short-term support at 16,755. The next support for the index is at 16,300. Breach of this level can take the index towards 15,700. The zone between 17,000 and 17,500 is the key resistance zone for the index now.

Amidst this bloodbath, most Asian indices including, PSE Composite, Shanghai Composite and Sri Lanka’s All Share Index, managed to stay resilient.

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