Technical Analysis

Index Outlook - Looking forward to Diwali fireworks

LOKESHWARRI S.K. | Updated on November 12, 2011 Published on October 22, 2011

Sensex (16,785.6)

The Sensex took one hesitant step backward from the 17,000 threshold last week. Selling pressure was absent but so was buying fervour. Perhaps the joy that spills out during the Indian festival of lights will provide the impetus to send stock prices rocketing skywards. Muhurat days have been game-changers in the past, perhaps it will be so this year too.

That may be a tough task given that Europe continues to be in doldrums. The RBI's next move on the policy rate front is also not likely to be benign to the stock market, since the headline inflation reported last week was far from comforting.

Volumes were very dull in the cash segment though derivative action perked up in the later part of the week. Open interest continues to be low reflecting investor apathy. Volume is likely to be tepid in the holiday-splattered week ahead that also has a derivative expiry and an RBI policy meeting thrown in.

The ‘comprehensive response' to Europe's debt crisis will be revealed on Wednesday and if that turns out to be disappointing, another churn is possible in the global markets in the later part of the week. Investors are better off taking the next week off from markets to spend time with their family.

Oscillators in the daily chart are declining slightly but they continue in the bullish zone implying that the short-term trend continues to be positive. The weekly rate-of-change oscillator is very promising since it is poised just below the zero line on the verge of crossing over into bullish territory. If it manages to move into the positive zone, it will mean that the medium-term trend is reversing higher.

The action is similar in index movement also. The Sensex is poised at key medium-term trend deciding level at 17,200. Break above this level will mean that the intense short-term turbulence is behind and that there is a likelihood of the index making some headway. Targets on a strong move above this level stay at 17,448 and 17,845.

The Sensex traded sideways between 16,670 and 17,188 last week. The support zone to watch out for in the upcoming sessions is between 16,500 and 16,650. Presence of both the 21 and 50-day moving averages in this region make it a strong pad from which a rebound is possible. If this zone remains un-violated, the Sensex can move on to 17,561 or 18,113 in the days ahead.

Short-term trend will be under threat only if the index goes on to close below 16,300. Possibility of a decline to the previous trough at 15,745 becomes a possibility then.

The medium-term trend continues to be under a cloud and the index has a long way to go, at least to move past 18,200, before investors can rest easy. However the positive factor that gives comfort is that the index is moving up from critical long-term support around 16,000. Though the odds are stacked against the Sensex at this point, a long-term trough is possible in this region. Many of the global benchmarks reversing from similar long-term support levels also fortify this hope.

The Nifty (5,049.9) disappointed last week by failing to get past the key hurdle at 5,170. The short-term trend will turn positive only if the index gets past this level, with the next targets at 5,230 or 5,350.

Traders can, however, draw heart from the fact that there was no sharp downward reversal last week and the index is instead consolidating in the zone between 5,000 and 5,160. Traders can hold their long positions as long as the index trades above 5,000. Sideways move between 5,000 and 5,170 will mean that the index can move higher to 5,231 or 5,278 in the days ahead. Rally beyond 5,350 is needed to make the medium-term view positive.

Decline below 5,000 will take the index lower to 4,947 or 4,897. Short-term view will turn negative only on close below 4,897. A move to 4,800 will then be on the cards.

Global Cues

Global equity markets held on to the hope that a resolution to Europe's troubles was imminent that made stock prices close in the green last week. That investors were feeling more optimistic was reflected in the CBOE volatility index remaining at lower levels between 30 and 36. But as we have been reiterating, this index needs to close firmly below 28 to imply that the short-term trend has turned positive.

The Dow fluctuated below the 11,650 mark for most part of the week before breaking upward to close at 11,808. Now that it has got past the challenge at 11,750, next hurdle is at 12,000. Emphatic close above this level will make the short-term view positive for the index and clear the way for rally towards the May peak of 12,840.

As mentioned before, the 10,400 support is a critical long-term support for the Dow and if it manages to hold above it, it will signify that the long-term trend continues to be up and the index can break out higher after prolonged movement (maybe lasting a year or more) in the region between 10,000 and 13,000. The S&P 500 has also taken support at the corresponding support at 1,100.

The weakness in US dollar index is also a factor helping equity prices. The dollar index declined further last week to near the support at 76. If this level is penetrated, that will spell the end of the current bout of turbulence in equity markets. Our Indian rupee can also breathe a little easy then.

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