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The week gone by was one of the most dramatic in recent times; with sound and fury, panic and exuberance along with the usual bunch of bewildered onlookers. Monday started with the Sensex plunging over 400 points. But just as the bulls began drawing up plans for a long hibernation, there was an equally sharp rally of around 500 points on Wednesday helping both the Sensex and the Nifty close at the highest level since January 2011.
Such whipsaws are common as benchmarks near critical hurdles as both bulls and bears try to wrest advantage from the other. The analyst fraternity, however, decided to attribute Monday’s fall to widening trade deficit and Wednesday’s rally to decline in headline inflation.
Decline in consumer price inflation and wholesale price inflation renewed expectation of the Reserve Bank of India cutting its policy rates further. Since that is currently perceived as a panacea for all ills, the bulls had the upper hand in the second part of the week. Standard and Poor affirming India’s sovereign rating at BBB- and saying that there was one in three chance of a rating downgrade over the next 12 months did not affect the market mood.
Derivative volumes surged on Wednesday along with the rally in stock prices. Open interest in NSE’s derivative segment closed at Rs 1,70,000 crore towards Friday implying that trading positions are increasing. FIIs have been buying Indian equity at a frenetic rate this May. The tally for net FII purchase this month has risen to $2.2 billion and the net purchase for the year is $13.5 billion.
The next lot of quarterly earnings will be keenly watched next week. The success of the Justdial IPO will help us gauge the extent of retail interest. Movement of the rain-clouds across the ocean as they draw close to our land will also be an important discussion point at tea-time.
Both the Sensex and the Nifty went on to close above their January peaks. Oscillators in the weekly chart are also beginning to signal a buy. Weekly relative strength index is now featuring at 64, giving a bullish signal. These are all positive signals from a medium term perspective.
Sensex (20,286.12)
Following a roller-coaster movement in the early part of the week, the Sensex went on to close the week 163 points higher. The index has short-term support in the band between 19,500 and 19,650. Short-term investors can buy in declines as long as the index trades above 19,500.
If the index continues moving higher next week, it can move on to 20,664 (January 2011 peak), 21,108 (November 2010 peak) and 21,206 that is the all-time high for the index.
If we extrapolate the move from the 15,748 low in the index, we get the first target for the index around 20,897. Since this also coincides with a cluster of resistances in the zone between 20,500 and 21,200, the index is now approaching a very important hurdle.
It is quite likely that the index reverses lower from this zone and heads back towards 18,000 or below over the months ahead. But if the hump around 21,200 is cleared, next medium-term target for the index is placed at 22,600.
Nifty (6,187.3)
The Nifty too recorded a sharp reversal on Wednesday that helped it close the week 80 points higher. Short-term supports for the index are placed at 6,113 and 6,060.
Short-term traders can hold their long positions as long as the first support holds.
If the index continues moving higher next week, next target will be the potent long-term resistance around 6,350 where the index formed two significant peaks, in January 2008 and November 2010.
If we consider the target of the move from 4,770 low, the index has the first target at 6,301.
Since this occurs close to the long-term resistance zone mentioned above, it is possible that there is some pause at this level. Medium-term target on a sharp move beyond 6,350 is 6,815.
Global cues
Global benchmarks continued marching higher led by the US and European markets. The DAX recorded yet another life-time closing high while the FTSE is less than 1 per cent away from its life-time high peak. CBOE volatility index continues at multi-year lows indicating that a bull market is in force currently and investors are quite sanguine about the prospects of equity markets.
There was consternation in the US market on Thursday on reports that the Federal Reserve could be reducing its quantitative easing programme.
But economic reading showing improved economic conditions buoyed sentiments helping the Dow close 236 points higher for the week.
The index is now closing in on our medium term target at 15,400. Next target is 15,677. A close below the 2007 peak at 14,198 is now required to signal that the medium term trend has reversed lower again.
Asian markets in Indonesia, Malaysia, Thailand and the Philippines continue to be gung-ho soaring to new life-time peaks.
The dollar index’ move above the July 2012 peak of 84.2 is a trifle worrisome. Next target for the index is 88.9, which is a key long-term resistance as well.
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