Technical Analysis

Index Outlook: Drifting towards critical support

Lokeshwarri S K | Updated on August 04, 2011 Published on July 30, 2011

Sensex (18,197.2)

Sensex' promenade around 18,500 was brought to an abrupt end by the RBI's aggressive policy rate hike on Tuesday. Stocks fell pell-mell following this move yanking the Sensex 353 points lower in that session. The shenanigans of US law-makers that had financial markets in a state half-way between disbelief and exasperation ensured that stock prices remained subdued for the rest of the week.

Disappointing earnings from some of the front-line companies added to the mood of dejection in the market. The FIIs seemed undecided about the market direction, net buying in some sessions and net selling in others. Derivative volumes crossed Rs 2,30,000 crore on Tuesday and Thursday, in the sessions that witnessed a sell-off in stock prices. July derivative expiry has, however, passed off without too much volatility.

The focus next week is likely to be on the drama in US legislature as the August 2 deadline for hiking the $14.3-trillion debt ceiling draws close. There could be a relief rally if a resolution is accepted by both Houses before the deadline. Progress of monsoon and other macro numbers will be closely watched as the results season tapers to an end.

The short-term trend turned negative last week with the Sensex moving below both the 50 as well as the 21-day simple moving average. The 14-day relative strength index has withdrawn to 41, while the rate of change oscillator has dipped in to the negative zone implying short-term weakness.

The weekly oscillators also declined into negative zone last week. While this could spell trouble, we need to see if the oscillators continue in this zone for a week more before concluding that the medium-term trend will deteriorate further. Momentum in the monthly chart is also beginning to give way.

As far as the medium-term outlook is concerned, inability to move beyond both the 200-DMA as well as the medium-term down-trend line in the early part of the week is a defeat of sorts for the bulls. But the medium-term outlook will turn dire only on a close below 18,000. In that event the decline can extend to 17,588 or 17,314.

The medium-term range for the Sensex is currently between 17,300 and 19,800. It is possible that buying emerges once again near the lower boundary of this range to take the index up.

But if the situation deteriorates in the global markets causing a sell-off here, decline to 16,635 or 16,200 will be possible.

As pointed last week, the Sensex has been forming a series of lower tops since last November forming a descending triangle.

This pattern will however be confirmed only when the base-line at 17,300 is breached strongly. In e-wave terms, there are multiple counts at this juncture as is wont in sideways moving market.

For the near-term, investors need to watch the support at 18,000. The down-move will accelerate only on a sharp close below this level. Else the index can attempt to move higher to 18,380, 18,513 or 18,749 in the days ahead. Failure to move beyond 18,380 will be an indication of an impending decline.  

The Nifty (5,482) too closed 152 points lower after recording the intra-week low of 5,453. As explained last week, key support that traders ought to watch now is at 5,404. Traders still holding long positions can continue to do so as long as the index trades above this level. Reversal above this level next week can take the index higher to 5,562 or 5,630. The short-term view will, however, turn positive only when the index closes above its 200 DMA at 5,700. Failure to move above 5,562 will be a sign of weakness.

The medium-term outlook will however deteriorate on a close below 5,400 since that will mean that the down-move from 5,945 is continuing. Downward targets in this case would be 5,328, 5,277 and 5,196.

The medium-term range for the index is currently in the band between 5,200 and 5,900. Traders holding short positions should be cautious as the index approaches the lower end of this trading band. Breach of this base can take the index lower to the area around 5,000.

Global Cues

Most global markets ended in the negative last week as the continuing impasse in the US legislature and renewed concern in Europe with Moody's threatening to downgrade Spanish debt made stock prices move lower. DJ Euro STOXX 50 gave up all the gains recorded in the previous week to end near its medium-term support at 2,600. CBOE volatility index moved to four-month high of 26 on Friday as the US markets sold-off on slowing GDP growth in the second quarter of the year.

The Dow closed 538 points lower, one of its worst weekly closes in recent months. The index closed below the short-term trend decider at 12,420 but it is attempting to hang around the next support at 12,200. If it continues to trade below 12,200 next week, it can then head lower to 11,860. The medium-term trend in the index will get roiled only on a weekly close below 11,860.

Asian markets were relatively subdued though some markets such as those in Indonesia and Thailand continued to record new life-time peaks. The dollar index is attempting to hold above the support at 73.5. Decline below this level will drag it further to the May low at 72.8.

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