Index Outlook: Market looks for a foothold

The medium-term trend is at risk, unless there is a smart turnaround soon

Equity markets are now on a slippery slope thanks to the selling fury unleashed last week by the crash in crude oil prices. Stocks are going to start the coming week on an extremely wobbly note as they react to the dismal industrial production numbers for October and the sharp dive in US equity market on Friday.

There was pandemonium in financial markets last week. Our hopes of a leisurely amble into the New Year were dashed as OPEC continued to pressure oil prices lower, sending Nymex crude to $58 on Friday. This caused a wave of global risk-off trades that made most global equity markets dive sharply.

As we have been reiterating, crude oil had important support zone between $60 and $65 dollar. Since many traders would have placed stop losses just below $60, break of this level will increase the downward momentum. Unless there is a strong recovery in the early part of next week, the slide could intensify, pulling crude prices toward the 2009 trough at $38.

This is not that great for earnings of oil companies or countries such as Russia and Venezuela whose primary exports are oil products. There are also concerns being expressed about possible debt default by these countries.

Both the Dow and the Nasdaq have lost more than 3.5 per cent last week making investors wonder if the long-awaited correction is finally here. As a thumb-rule, investors expect benchmarks to fall at least 10 per cent to signal a correction. A decline of more than 20 per cent is needed to signal a bear market.

While no one is really expecting the bear to emerge from its lair, either in the US or India, many investors waiting on the sidelines would welcome a correction since that would provide them an opportunity to enter the market.

Economic data has not been cheerful. OECD Lead Indicator showed that the Euro Zone is at risk of sliding back into recession with the UK and Russia at higher risk.

While the slide in consumer price inflation in India is worth cheering, the sharp contraction in industrial production has been a shocker.

Momentum in the daily chart deteriorated significantly last week. Price rate of change oscillator moved into the bearish zone and the relative strength index is close to oversold zone.

Weekly oscillators are moving in the neutral zone, implying that the medium-term trend has not reversed lower yet. But negative divergence in some of the momentum indicators implies that a reversal could be on the cards.

Sensex (27,350.7)

The short-term trend has reversed lower after the sell-off.

The week ahead: The bearish candle in the daily chart of the Sensex and the close below the 50-day moving averages are negatives for the index.

But the move last week is in consonance with our view that a five-wave pattern from October-17 low completed last week.

The index is currently poised at a critical support, just around the 50-DMA and the previous peak formed on September 9. The next support for the short-term is at 27,050.

Short-term investors should keep away from market on a dip below 27,000. For, the next support is at 25,910.

If the index manages to move higher in the early part of next week, resistances will be at 27,912 and 28,256.

Medium-term trend: If we assume that the move that began at 17,448 is now complete, then the current correction should drift lower down to 24,500 in the Sensex.

This could happen in a gradual manner.

The movement of the Sensex next week and the strength in the pull-back, if any, will give us more clues about the medium-term intention of the index.

Nifty (8,224.1)

The Nifty too drifted lower to close just above its 50-day moving average on Friday.

The week ahead: The index has closed on a negative note on Friday. With the weak industrial production numbers and sell-off in US on Friday, Nifty could open lower on Monday.

Immediate support to watch is at 8,082. Traders with short positions should watch out for a reversal from this region.

Fresh short positions are advised only on a strong close below this level. The next target is at 7,737.

Rebound next week will face resistance at 8,375 and 8,473. Inability to move above the first hurdle will be the cue for traders to initiate fresh short positions with stop loss at 8,480.

Medium-term trend: Our medium term view is unchanged. The fall last week strengthens the wave-count of completion of the move that began in August 2013 at the recent peak.

The extent of the pull-back next week will determine if this is the onset of a medium-term correction. A strong close below 8,090 will be the first indication of a deteriorating medium-term trend.

If a medium-term correction is in progress, the Nifty can drift lower towards 7,724 or 7,600 over the coming weeks. A sideways move between 7,600 and 8,600 can then ensue for a few months. The outlook will deteriorate significantly only on close below 7,600.

Global cues

Many global benchmarks took a deep dive last week with some commodity-heavy indices such as Brazil’s Bovespa and Russia RTSI declining 7.6 and 12 per cent, respectively. Indices such as the CAC and the FTSE are now in the third leg of the wave that began in September.

The evening star and bearish engulfing candle in the weekly chart of the Dow implies that the correction could extend for some more time. Immediate support for the index is at 17,135.

A breach of this level will take it lower to 16,650.

As long as the second support holds, the medium-term outlook is not under threat.

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