Technical Analysis

Index Outlook: Sensex holding above 200-DMA

LOKESHWARRI S.K. | Updated on June 23, 2012 Published on June 23, 2012

It was a week full of sound and fury that signified nothing, at least in index terms. The RBI shocked markets by keeping policy rates and reserve ratios unchanged, Fitch dealt a blow by cutting the outlook on India’s sovereign credit and a bunch of Indian companies, the Competition Commission of India slapped a crippling fine on cement companies and Canada's Niko Resources slashed the reserves estimate at the KG D6 gas blocks. But stocks took this bevy of bad news in their stride.

The Sensex and the Nifty indices tripped on Monday to close sharply lower.

But both indices recovered thereafter to close marginally in the green. Perhaps their ability to react to negative news has reached a saturation point. There was some relief as Greece managed to cobble together a pro-bailout coalition.

Turnover in both cash and derivative segment improved on Friday as the indices clawed back to higher levels. FIIs continued to nibble at stocks through the week.

They have net purchased stocks worth $117 million so far this month. Their net purchases this calendar year equals $8.5 billion in equities and $4 billion in debt.

After a news-heavy week, market players will look sky-wards, at the progress of monsoon, for further cues. Volatility will rule the roost next week as the June derivative contracts roll in to expiry.

Open interest continues to be comfortable around Rs 1,35,000 crore, so undue turbulence is unlikely due to the futures and options expiry.

Despite the gyrations, there are some positive takeaways from last week’s trade. Both the Sensex and the Nifty continue to move above the 50- and 200-day moving averages (DMA).

The 50-DMA has also moved above the 200-DMA which is a buy signal. If the indices sustain above this cross-over it will be positive for the coming weeks.

Another positive signal is that both the daily rate of change oscillator as well as the moving average convergence divergence oscillator have moved in to the positive zone.

Weekly and monthly oscillators are also attempting to move in to positive territory. In other words, if the indices sustain above current levels, the medium-term term outlook could gradually turn positive.

Sensex (16,972.5)

The Sensex continued its sideways movement with a positive bias last week as well. As discussed earlier, this is a running correction that has bullish connotation. The short-term view remains positive for the Sensex and target once it breaks above 17,000 are 17,343, 17,467 and 17,781.

There is likely to be strong resistance around 17,500 and investors should watch their step in this zone. Short-term view will stay positive as long as the index trades above 16,550. Short-term investors can continue to buy as long as the index trades above this level.

But breach of this level will mean that the index can move lower to 16,400 and 16,245. Investors need to start worrying only if the index closes below 16,200.

Such a move will mean that the medium-term down-trend has resumed that can pull the index lower to 15,335 or 15,135.

As explained earlier, the index has long-term support around 15,000. Formation of a higher trough around 16,000 is a positive for the long-term prospects of the market.

The Nifty (5,146) too moved higher after the jolt on Monday. The formation on the daily chart is bullish and the index can break higher to 5,270 or 5,301 in the near-term. Short-term traders should watch out for the resistance around 5,300. This level needs to break before the index moves on to 5,406.

Traders can buy in declines as long as the index trades above 5,030. The positive short-term view will cease on a move below this level. Subsequent supports would be 4,980 and 4,930.

Medium-term view will turn negative only on close below 4,930. This will imply that the long-term downtrend has resumed. Downward targets in this case will be at 4,658 and then 4,588.

Global Cues

Global markets were buffeted by series of news, both good and bad. While the prospect of Greece’ immediate exit from the euro zone was averted, slowing manufacturing in Germany and Moody’s downgrading a bunch of banks including Bank of America and Goldman Sachs again brought back turbulence to global markets.

Most benchmarks ended the week slightly higher. CBOE volatility index declined below the 20 mark to end the week at 18 implying that investors were feeling more complacent.

The Dow reversed lower after hitting the peak of 12,898 last week. Since the index was unable to move above the resistance at 12,810, the near-term outlook stays negative. This level needs to be crossed to indicate a propensity to move towards the recent peak at 13,339.

Many Asian benchmarks including Japan’s Nikkei Index, Philippines PSE Composite, Straits Times and Taiwan Weighted Index managed to close in the positive terrain.

Strength in the dollar is once more pulling gold lower towards its recent support at $1,564. It might be recalled that the metal has rebounded from this level thrice since October 2011.

But the formation of a descending triangle pattern on the weekly chart is negative and indicates the possibility of decline to $1,450 or even $1,210. Investors, however, need to begin worrying only on a firm weekly close below $1,500. This appears to be a psychological support as well for the metal.

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