INDEX OUTLOOK - Rocky ride to the Budget

It was a bumpy ride for stock investors last week. A hesitant rally that began on falling headline inflation numbers in the early part of the week fizzled out on Moody’s warning to India about the implications of its widening current account deficit.

Onset of a correction appears to have sent most investors to the fence where they could remain perched till the Union Budget. Equity volumes were lacklustre, though derivative volumes improved close to the weekend.

The gush of foreign portfolio flows too slowed down last week. But we have received net inflows of $3.9 billion in February and the tally for the year is $8 billion. Open interest in NSE derivative segment is edging higher at Rs 137,000 crore even as short positions decreased in market, as evidenced in the declining index put call ratio.

Investors had to assimilate a slew of economic numbers last week. Headline inflation numbers declining to 6.62 per cent in January raised hopes that the Central Bank could ease policy rates again. Core inflation is growing even lower at 4 per cent. But consumer price inflation is showing no signs of cooling down, growing at 10.7 per cent. Industrial production continued to be dismal, declining 0.6 per cent in January.

The proceedings could be quiet in the run-up to the budget as the prognostication on various budgetary proposals reaches a crescendo. Stock-specific action based on budget expectation could begin providing some amusement to traders.

Oscillators in the daily chart continue to move in the negative zone implying that the near-term outlook remains negative. Negative divergence in the weekly rate of change oscillator and sell signal in the moving average convergence divergence oscillators are a cause for worry as it implies that the medium-term trend could be turning negative. Momentum indicators on the monthly chart are also beginning show some cracks.

Sensex (19,468.1)

The Sensex closed almost unchanged last week after a see-saw movement. That the rally halted at the first short-term target indicated in our last column implies that the short-term view for the index remains very weak. It will continue to face resistance at 19,735. Inability to get past this level in the early part of the week can pull the index lower to 19,236 or 18,936.

If the index reverses next week and goes on above 19,723, subsequent targets are 19,900 and 20,200.

The medium-term trend in the index is not under a threat yet. But as explained earlier, the index has many targets converging in the zone between 20,000 and 20,500. This increases the possibility of a medium term peak at this juncture.

It is possible that the current correction drags the index down to 18,500 and the index spends a few months consolidating in the zone between 18,500 and 20,500 before attempting to move higher.

The positive medium-term view will be negated only on close below 18,500. That will signal the onset of a deeper correction that pulls the index down to 18,000 or 17,450.

The Nifty (5,887.4) followed our script closely last week, reversing from the 5,969 level to hit the intra week low of 5,828.

Short-term resistances are placed at 5,924 and 5,970. Reversal from either of these levels will mean that the index can move lower to 5,825 or 5,736 in the weeks ahead.

Short-term traders can hold their short positions with stop at 5,980. Targets above this level are placed at 5,983, 6,014 and 6,110.

Medium-term trend in the Nifty continues to be up. Investors need to watch the support zone between 5,600 and 5,700. The outlook for this time-frame will reverse lower only on close below 5,600.

Global cues

It was a quiet week in the global equity market with focus shifting on gold and crude. Both the commodities started correcting last week. Gold lost $32 to close at $1,634. The medium-term trend in the yellow metal however continues to be up since it has key medium-term support at this level. Any further decline will, however, mean that the metal will start hurtling lower towards the long-term support zone between $1,450 and $1,550.

Gold is in a protracted long-term correction since the September 2011 peak at $1,920. This will be construed as a long-term consolidation phase building the base for the next break above $2,000. This view will be negated only on close below $1,450.

Investors in the US continue to be gung-ho with the indices in this country ruling just slightly below their life-time highs. CBOE VIX reflects this complacency, trading close to the lows at 12.3. University of Michigan’s consumer sentiment index also gave a positive reading of 76.3, above the forecast of 74.8 for the month of February.

The Dow is moving in an extremely narrow trading range between 13,900 and 14,000 over the last two weeks. Since this move follows a strong uptrend from January 2013 low, there is a possibility of the index moving higher to a new life-time high soon. This view will be negated only on a close below 13,730.


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