Index outlook: Market to trudge sideways

The Chinese typhoon has thankfully blown over and the market is now obsessed with the Federal Reserve — when it will raise rates and how domestic inflation will move. This can make stocks waver for a while before a clear trajectory emerges.

Stocks started the week on a shaky note as a slew of weak results had dampened sentiment in the market. But the news that China had adjusted the yuan reference rate lower sent a panic wave through global markets with all major equity markets as well as currencies plummeting.

The market misread China’s move on Tuesday to imply that it had embarked on the path of devaluing its currency in a bid to use the surplus capacity in its factories and to bolster sagging exports.

But with the People’s Bank of China’s clarifying that the move was only aimed at linking yuan to market demand and supply and was not the beginning of a sustained depreciation, financial markets recovered. Chinese banks too got into the act late on Wednesday and Thursday to support the yuan, forcing short sellers to cover their positions.

The rupee however, turned quite nervous following the yuan’s move. The weekly close slightly below the important support level at 65 is a trifle worrisome. But we need to watch the movement next week before pressing the panic button. If the rupee reverses from 65 level, it can move towards 62.7 or 61 again.

Rupee stability is important for the market as it has a direct bearing on FPI investments. The flows into equity turned negative last week. Net outflow for August equalled $178 million. But the inflow for the entire 2015 remains strong at $7 billion.

Macro data was however, cheerful last week with decline in both the CPI and the WPI and strong industrial production numbers. Progress of the monsoon is however, an important determinant of inflation and needs to be closely tracked, especially since rains in August have fallen really short.

As August draws to a close and come September, the market will get more and more jittery about the Fed’s impending monetary tightening. The minutes of the FOMC’s July meeting to be released mid-week will therefore be closely scrutinised to read Fed’s mind about when it intends to hike rates.

How they oscillate With the sell-off last week, the Sensex and the Nifty have once again moved within the area between the 50- and 200-day moving averages. The oscillators on the daily chart have moved into the negative zone, but they are poised just below the zero line, implying that an upward reversal is possible this week.

The positive divergence in the weekly price rate of change oscillator shows that the medium-term trend is turning bullish. There is however, unmistakable deterioration in the long-term momentum oscillators. This implies that even if indices move a little higher from the current levels, they could be getting ready for a large decline in the coming months.

Nifty (8,518.5) After a roller-coaster week, the Nifty closed on a slightly negative note. But the hammer pattern on the weekly chart means that the short-term trend is ambivalent and a move in either direction is possible from here.

The week ahead: The index has been moving sideways in a triangle formation since July. It is not clear if this is a distribution pattern or a sideways consolidation before the index breaks higher. These are the guideposts for the week.

a) There is immediate resistance for the index at 8,515. If it fails to make headway on Monday, it can decline to 8,456, 8,413 or 8,338.

b) Break above 8,550 will mean that the index is heading towards 8,621 and then 8,654. The key short-term resistance stays at 8,654.

It is best to be prepared for a move in either direction.

Medium term trend: The medium-term trend is down. We stick to the count that the upward move from 7,940 is correcting the decline from 9,119.

The area around 8,650 therefore, remains an important hurdle to watch. Reversal from there can pull the index down towards 8,000 again. But break above this level will take the Nifty to a new high.

The current sideways move between 8,350 and 8,650 reflects the equal forces of buying and selling at current levels. It is therefore best to wait for a firm push beyond either the upper or lower boundary before drawing any conclusion.

Sensex (28,067.3) The Sensex too snapped back strongly on Friday to end the week less than 1 per cent lower.

The week ahead: The Sensex has been stuck in the 27,400-28,600 range since the beginning of July. The index needs to break beyond either of these boundaries to set its trajectory.

The Sensex now tests resistance at 28,057. A move above this level will take it to 28,417 and then to 28,578. Supports for the week are at 27,857, 27,700 and 27,512.

Global cues Most global markets ended sharply lower last week following the turbulence caused by China. European stock markets were badly impacted and the DJ Euro STOXX 50 closed almost 5 per cent lower. If the yuan declines in value, the benefit for the European Union from a cheaper euro will diminish.

The Dow however, recovered after hitting the low of 17,125. As explained earlier, the area around 17,000 is an important support zone for the index. A close below this level will usher in a medium-term correction in the index. The resistances next week will be at 17,600 and 17,900.

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