Index Outlook - Stocks in a period of calm

The onset of summer has lulled equity market in to a somnolent state. Stocks ambled sideways accompanied by low volumes. Disturbing news out of Spain and weak external trade data failed to shake the market out of its lethargy and both the Sensex and the Nifty ended the week with slight gains.

Volumes were very dull in both the cash and derivative segments. Market players appear to have made the best of the long weekend to take a well-deserved break from work. Derivative turnover was at a record low of around Rs 75,000 crore. FIIs were net buyers in the truncated week.

Next week promises to be more interesting with Infosys setting off the last quarter earnings season. Macro data on industrial production and headline inflation will be closely scrutinised to gauge the RBI's next move on monetary policy.

Rumblings out of Europe can cause some instability. That the US indices are perched at the highest level for the year and have not undergone any meaningful decline in the last three months makes them susceptible to correction.

Momentum indicators in the daily chart made an attempt to move in to the bullish zone but failed and reversed lower.

These indicators are, however, hovering in the neutral region since the end of March when the Sensex recorded the low at 17,000.

Movement of the 10-week rate of change oscillator is noteworthy. It is moving around the zero line since June 2010 implying that the market is in a long-drawn consolidation phase over the last two years.

Sensex (17,486.02)

The Sensex hit the high of 17,664 on Tuesday before declining in the next session.

The short-term trend in the index is up since the trough of 16,920 recorded on March 29. As explained earlier, the formation of a morning star at this junction denotes a short-term reversal.

But the index faces short-term resistances at 17,540, 17,721 and 17,910. Short-term traders should watch out for reversal from either of these levels. But a move beyond 17,910 will imply that the second wave from 15,135 low could have ended at 16,920. Medium-term targets will then be 18,523 and 19,014.

If we consider the 61.8 per cent retracement of the slide from 21,108 peak, we get the target of 18,826.

In other words, rallies this calendar will face strong resistance in the band between 18,800 and 19,000.

Reversal from here can pull the index down to 17,500 or 16,500. In other words, we are facing a sideways moving market for this calendar.

Short-term support for the index is at 17,204 and then 16,920. If the index holds above the first support, the positive short-term view will be retained.

Medium-term view stays positive as long as the index holds above 17,000. Targets on close below this level are 16,829 and 16,429.

Long-term trend in the index is down since November 2010. We are already 17 months in to this down-move.

The move from 15,135 appears to be a pull-back within this down move that will have trouble moving past the above-mentioned resistance zone around 19,000. This level needs to be breached strongly to take the index towards its previous life-time high.

Nifty (5,322.99)

The Nifty moved to the high of 5,378.7 on Tuesday before declining slightly. The short-term trend in the index is up since the low of 5,135.9 recorded on March 29.

Short-term traders can buy on declines as long as the index trades above 5,228. Next short-term support is at 5,136.

The current short-term up move will face resistances at 5,324, 5,382 and 5,439.

The index needs to move beyond 5,440 to indicate that the third leg of the up move from 4,531 could be unfolding. This move has the medium-term targets of 5,630 and 5,814.

The 61.8 per cent retracement of the down-move from 6,338 gives us the target at 5,647.

The index almost achieved this target in February. It is expected to continue to face strong hurdle in the zone between 5,600 and 5,800.

Medium-term view will stay positive as long as the index trades above 5,150.

But supports on a decline below this level are at 5,080 and 4,950. Long-term view will turn negative only on a strong weekly close below 4,950.

Global cues

European indices such as the CAC, DAX and FTSE slid on concerns regarding Spain. Spread between yields on the 10-year Spanish debt and German debt widened to the highest level this year.

The Spanish Prime Minister, Mr Mariano Rajoy's comment that Spain was in “extreme difficulty” did not help matters.

CBOE volatility index moved up slightly to fluctuate between 15 and 17 last week signalling that there was an edge of nervousness among market players last week.

Sentiment in the US was roiled by weak US jobs data and the Federal Reserve ruling out another round of quantitative easing unless economic growth falters.

The Dow fluctuated between 13,000 and 13,300 before ending the week close to the lower band.

The index is moving within the same band over the last three weeks.

This is keeping the short as well as medium-term view unaltered. Short-term target remains at 13,500 and medium-term target at 14,198.

This positive view will be negated only if the index goes on to close below 12,700.

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