Index Outlook - Stepping below 17,000

It doesn't take much to spook the market these days. You just have to stand up and shout “Mauritius” or “GAAR” and stocks will tumble pell-mell. Stocks that were coasting along peacefully till Thursday took a sudden dive on reports that Mauritian tax treaty might be reviewed.

Rupee threatening to go below its previous low at 54.3 against the dollar and burgeoning trade deficit were the other factors that roiled sentiment, pulling the Sensex below 17,000 and the Nifty below 5,200.

Much noise is also being made about FIIs turning away from the Indian market due to the uncertainty on GAAR. But if we consider the flows from these investors as published by SEBI, there was mild outflow of $82.7 million in April and inflow of $166 million in May.

The secondary market has received $8.5 billion so far this year.

This data shows that despite the tax treatment tangle and the S&P downgrade, foreign investors have not really pulled money out of the country.

They seem to be more in the wait-and-watch mode. As we have mentioned earlier in this column, even if the Mauritian route for FII flows is closed, it will have only a short-term impact. Foreign investors will find other conduits for investing in the country.

Volumes in the cash and derivative segment were subdued at the outset but picked up towards the weekend. Open interest remains below Rs 100,000 crore and the put call ratio is also low close to 1 indicating that many shorts have already covered their position.

The upcoming week is likely to be heavy on news flow. Quarterly earnings will continue to vie for investor's attention.

The Finance Bill scheduled to be passed next week and industrial production numbers will provide the other interesting sidelights.

Momentum indicators in the daily chart have declined into the oversold zone. Weekly oscillators are still in the neutral zone on the verge of entering the negative zone.

That both the Sensex and the Nifty have closed below the 200-day moving average is a trifle disconcerting. But the indices need to continue trading below this level for few more sessions before we can consider this a definitive breach.

Sensex (16,831)

The Sensex moved to the high of 17,432 on Wednesday before turning downward to reach the intra-week low of 16,777. Short-term trend for the index has now reversed lower with the close below 17,000. We should give the index filter of one more session to climb back above this level. If it does not do so then we will have to assume that the downtrend that began at February peak is resuming.

The sideways move witnessed since March 29 could be the second wave that unfolded into a descending triangle. The third leg of this move has the minimum target of 16,441. Since this coincides with the 61.8 per cent retracement of the up-move from 15,135, investors should now watch out for the medium-term support in the band between 16,400 and 16,500.

As we have been reiterating, long-term view will stay positive as long as the index holds above this support. But close below 16,400 will mar the long-term view paving the way for further decline to 15,829 over the medium-term.

Short-term trend is currently very weak and the index can decline to 16,429. Short-term resistances would be at 17,037, 17,190 and 17,444.

Inability to move above the first resistance will indicate a propensity to decline in the near term. Strong close above 17,443 is needed to signal that the worst is over as far the near-term trend is concerned. Subsequent hurdles will be at 17,650 and 17,856.

Nifty (5,086.8)

The Nifty reversed lower from the intra-week high of 5,279 to close 122 points down. Close below 5,100 implies that the short-term trend has reversed lower in the index. If we assume that the C wave of the down-move from 5,621 is currently in progress, the targets are 5,058 and 4,882.

Fibonacci retracement of the up-move from 4,531 low gives us the targets at 5,080 and 4,950. In other words, if the decline continues next week, investors can look out for the support at 5,058 and then at 4,950. Long-term view will turn negative only if the index goes on to close below 4,950.

Short-term trend in the index is down but it is drawing close to critical supports at 5,080 and 4,950. Traders should, therefore, watch out for reversals from these levels. Short-term resistances are at 5,200 and 5,280. Traders can initiate fresh short positions if the index is unable to clear the first resistance.

Short-term trend will turn positive only when the index moves above 5,280. Subsequent targets are 5,357 and 5,424.

Global Cues

Global stock markets took a step lower last week. Volatility returned with the results of elections in France around the corner and Greece going in for polls. Weaker than expected job numbers in the US in April also pressured stocks lower towards weekend. This is reflected in the sharp spike in CBOE volatility index on Friday. The index moved sharply higher to close at 19.1 in that session.

The bearish engulfing candlestick in the weekly chart of DJ Euro STOXX 50 does not bode well for the prospects of European stocks. It implies that the medium-term trend continues to be down in this index and there is a possibility of further decline to the next medium-term support at 2,200 that is 2 per cent below current levels.

The Dow reversed lower once again after flirting with the resistance at 13,300. This index has made repeated attempts to get past this level since mid-March. It can now decline to 13,057 or 12,513 in the weeks ahead. The positive short-term outlook will however not be challenged as long as the index holds above 12,500. Medium-term trend in Dow stays positive as long as it holds above 12,200.

Many benchmarks in emerging Asia recorded a strong week. Jakarta Composite and Philippines PSE Composite moved to a new life-time high while Karachi 100 surged 4 per cent higher.

>lokeshwarri_sk@thehindu.co.in

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