Index outlook: Skating on thin ice

The high-octane action in the stock market last week is likely to be followed by a more subdued week. The limelight will be on Raghuram Rajan in the truncated week, as he unveils the Reserve Bank of India’s next monetary policy move on Tuesday.

Faint cracks appeared in market sentiment last week with mid- and small-cap stocks taking a deep cut. The action over the next two weeks will be critical to determine if the long-awaited correction has finally set in.

Uncertainty and turbulence returned to global markets last week. Fear of the US Federal Reserve hiking interest rates, concerns on the health of the Chinese economy and the unresolved political impasse in Ukraine pulled most global markets lower.

Indian markets were also buffeted by the volatility caused by the expiry of the September derivative contracts. Further, the upcoming holidays would have made traders and investors take money off the table.

The Supreme Court deciding to cancel the allocation of 214 coal blocks made the stocks of the affected companies dive. The launching of the Make in India campaign and the forthcoming visit to the US were other factors that kept investors diverted.

The reversal in global sentiment is a little worrying. The strengthening dollar does not bode well for equities in emerging markets. According to EPFR Global, Emerging Markets Equity Funds posted back-to-back weeks of outflows for the first time since March.

Foreign portfolio investors turned net sellers in equity market last week and their tally for September so far is just $848 million. If this reversal in sentiment continues, equity prices could be hurt further.

Oscillators in the daily chart are declining but they have already reached oversold territory implying the possibility of a short-term turnaround. It is the weekly oscillators that need to be more closely monitored. Weekly price rate of change oscillator is falling towards the zero line. A move in to the negative zone will make the medium term view negative.

Sensex (26,626.3) The Sensex hit the intra-week high of 27,256.9 before plunging lower.

The week ahead:  We have a double-top formation on the daily chart. But this can be part of a flat consolidation pattern before the index takes off higher again. The action next week is, therefore, important to determine the medium-term trend.

If Friday’s rally fails to move past 26,887, it will mean that the index will decline to 26,220 or 26,032 in the week ahead.

The index needs to fall below 25,233 to make the short-term trend negative.

If the Sensex gets past 26,887, next targets are 27,354 and 27,531.

Medium-term trend:  The Sensex continues to trade above the 26,000 support indicated last week. But deterioration in weekly oscillators is a cause for worry.

Key medium-term support stays at 24,500. Medium-term target on a close above 27,400 stays at 28,400.

Nifty (7,968.8) The short-term trend in the Nifty too is beginning to look weak.

The week ahead:  The Nifty reversed higher after testing the 50-day moving average on Friday. The guideposts for the days ahead are:

The rally will face immediate resistance at 8,032. Failure to move above this level will be the cue for traders to initiate fresh short positions with the stop loss at 8,050. Downward targets are 7,790 and 7,718.

A sharp fall below 7,718 will mean that the index is heading towards 7,540. Investors need to panic only if this level is breached. If Nifty gets past 8,032, next targets are 8,180 and 8,236.

Medium-term trend:  We retain a positive medium-term view for the Nifty. If the index manages to hold above 7,800 next week, it will be positive for this time-frame.

The medium-term view will stay positive as long as the index trades above 7,000.

Global cues Most global markets sold off in the early part of the week. But they recovered on Friday to reduce the weekly loss to some extent. CBOE volatility index spiked to 16.7 during the week as investors worried about the impending interest rate hike in the US.

The Dow hit the high of 17,277 before declining to 17,000. The recovery on Friday helped the index close with less than 1 per cent loss.

As explained last week, the index has key short-term support at 17,000.

Recovery above this level will mean that it is heading towards 17,500 or 17,700 in the coming weeks.

Short-term trend will be threatened only on a close below 16,300.

The dollar index moved higher last week, breaking past the hurdle at 85. It now faces the next resistance at 89, that is the peak formed in November 2010.

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