Index Outlook: Cracks appear in the uptrend

The Union Budget for 2014 has been heard, read, analysed and understood. So what is in it for investors? Overall, it is a practical Budget focusing on controlling the deficit and doing whatever possible to give an impetus to the investment cycle. But stock market investors have a reason to be disappointed.

The Finance Minister maintained a silence on transaction tax in both equity and commodities. While it can be argued that equity markets are robust and hence can absorb the Securities transaction tax (STT), commodities markets are reeling due to the Commodities transaction tax (CTT) imposed in the last Budget. Volumes are down sharply in commodity exchanges and the FM could have given this segment a lifeline.

Foreign investors too have a reason to be peeved since the Budget is silent on the General Anti- Avoidance Rules. This means that the foreign investors routing their investments through other countries to save capital gains tax can come under the tax man’s lens 1st of April, 2015 onwards. The sell-off on Friday was partly due to that.

That said, now that the Budget party is done with and we know how much leeway the Government really has to make dramatic change in policies, it is time to return to brass tacks. Look at stock valuations against the background of their growth prospects and balance sheet health to evaluate whether you need to hold on to it or to book profit and exit.

Stock market appeared confused on the Budget day; The Sensex first took a deep dive as the FM decided to do nothing about retrospective tax, then it recovered as the tax proposals and budgetary allocations met with market approval and then slid after the Budget speech ended, to close in the red.

As explained last week, stocks had risen to unjustified levels in the pre-budget rally and some more profit booking is possible in the days ahead. We are expecting a medium-term correction to set in. The movement of the indices this week should tell us if it has already begun at the peak of 26,190 in the Sensex and 7,809 in the Nifty.

The movement of the market this week could be more subdued. Investors will turn their attention towards corporate earnings.

Action of the foreign portfolio investors after the Budget announcements will also be of interest.

Oscillators in the daily Sensex and Nifty chart took a deep dive and plunged into the negative zone implying a reversal in the short term trend. Weekly oscillators are dipping slightly but there isn’t a sell signal yet.

Sensex (25,024.3) The Sensex has moved 937 points lower from the intra-week high of 26,190 hit on Monday. The bearish engulfing candle in the weekly chart is ominous. Unless the Sensex moves on to a new high in the next two weeks, this could be the beginning of a medium term down trend.

The week ahead: Immediate support that investors need to watch is at 24,783. Fresh purchases can be made if the index reverses from this level. But do not make any short-term purchases on a decline below 24,734. It will imply that the index is heading towards 24,314 or 23,820.

Short-term resistance for the Sensex will be at 25,753 and 26,190.

Medium term trend: The medium term trend in the index continues to be up. But the fact that we have some medium-term targets converging at 26,000 makes it necessary that investors exercise caution in the region between 26,000 and 26,500. Key medium term support remains at 22,340.

Nifty (7,459.6) The Nifty hit the high of 7,808 before ending 292 points lower for the week. It is obvious that investors consider FM Arun Jaitley’s Budget a goldilocks budget since it hasn’t dipped below 7,318.

The week ahead: The momentum is downward for the index. The decline can continue in the early part of the week to take the Nifty lower to 7402 or 7198. Short term traders should watch out for reversal from 7361. Presence of the 50-day moving average at this level makes it a strong support zone. Short-term trend will turn lower on a close below 7,100.

The resistances for the week ahead are at 7,591, 7,673 and 7,808. Failure to move above 7,591 will be the cue for traders to initiate fresh short positions.

Medium term trend: The medium-term outlook for the Nifty stays positive. But strong resistance in the zone between 7,800 and 8,000 makes it a potential reversal zone. So investors need to tread cautiously at this level. The medium-term outlook will however will turn negative only on a close below 7,100.

Global cues

It was Argentina’s Merval that was the top gainer last week; up 8 per cent.

The success of their football team in the FIFA World Cup seems to have enthused stock market investors too. A win by Argentina on Sunday can make this index shoot higher next week.

Germany’s DAX is a study in contrast. This index was down 3.4 per cent last week, probably weighed down by Portugal’s problem, or maybe the German investors are not as greatly interested in football.

The Dow sold off in the early part of the week on concern that the market is getting heated up. The index has, however, bounced from the intra-week low at 16,805. We maintain the view that the short-term view will turn negative only on a close below 16,740. Surprisingly, many Asian indices closed the week with gains though there is a deep gash in the chart of SGX Nifty.

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