Index Outlook: Placid start to 2012

It was a quiet week in the equity market with market participants yet to shake off their holiday stupor. The burst of energy witnessed mid-week on the back of expansion in PMI reading and sharp drop in food inflation petered off and stocks drooped again towards weekend.

The Government allowing qualified foreign investors to invest directly in equity added some cheer. The market regulator's machination to allow government undertakings to divest stake without approaching retail investors provided the other interesting sidelight to the week's trading.

The lackadaisical movement in stocks backed by very thin volumes in both cash and derivatives is uncharacteristic of our market that typically witnesses a flurry of activity in the first fortnight of January. As a contrarian indicator this does bode well for our stocks.

Open interest in derivatives is also very low, below Rs 100,000 crore implying that traders are still sitting on the banks, not yet sure if they want to jump in or not. FIIs have been net buyers so far this year.

Market participants will start prognosticating on third quarter numbers as the earnings season draws near. Macro data will also be closely scrutinised to second-guess the RBI's next move in the monetary policy review scheduled for the end of this month.

Oscillators in the daily chart of both the Sensex and the Nifty moved slightly in to positive zone. Positive divergence in weekly relative strength indicator means that the down-move is losing momentum.

Sensex (15,848.8)

The Sensex pulled itself higher from Monday's low of 15,358 to end 393 points higher. Formation of higher trough is a short-term positive though the struggle to move above 16,000 is not.

The medium-term trend in the index remains down and we are desperately in need of a strong trigger to shake the market out of this despondency. If we consider the weekly chart of the Sensex, the index is moving in a sideways range between 15,350 and 16,000 over the last three weeks. Though the decline is losing momentum, continued movement below 16,000 shows the propensity to move below 15,000 in the upcoming weeks.

The index needs to move past the resistance zone between 17,500 and 18,000 to turn the medium-term view positive.

The index could however try to build on this rally next week and move higher to 16,273, 16,622 or 16,838. The resistance that investors need to watch out in the week ahead is at 16,300. Close above this level will make the short-term view positive and pave the way for rally to higher levels. Conversely, failure to move beyond 16,300 will mean that the index will decline to 15,670, 15,465 or 15,135.

The Nifty (4,746.9) too recovered from the intra-week low of 4,588 to close 130 points higher. The short-term trend is positive due to the formation of higher bottom. The index could attempt to move on to 4,881, 4,955 or 5,001 in the days ahead. Traders can buy in declines as long as the index holds above 4,660. Key resistance that traders need to watch out for is at 4,880. Short-term view will turn positive once the index moves above this level.

However, failure to move above 4,880 will mean that the near-term view remains cloudy and the index can decline to 4,630 or 4,530 in the upcoming sessions.

The medium-term trend in the index continues to be down. The sideways move witnessed over the last three weeks implies that bears continue to hold upper hand. But the outlook will turn very negative only if the index goes on to close below 4,600.

Global indices

Stocks world-wide began 2012 on a tentative note. Sovereign debt problem in Europe continued to weigh on market with 10-year Italian bond yield moving above 7 per cent again.

The good news towards the weekend was the drop in US unemployment to 8.5 per cent and a strong addition to jobs in December.

Most benchmarks closed slightly higher. CBOE VIX slipped during the week to close at 20.6 implying that investors were feeing sanguine regarding the prospect of 2012. The Dow moved with an upward bias to close at the highest level in the last five months.

Next target for the index is 12,761. This is achievable if it manages to hold above 12,000 in the upcoming sessions.

The dollar surged towards weekend as euro zone worries pressured the euro lower. Dollar index moved to 52-week high of 81.6. The strength in dollar spells bad news for our equity as rising risk aversion will prevent inflows in to emerging market equity.

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