Index Outlook: Watch out for heightened volatility

Frontline indices had a sedate week even as the party in mid and small cap stocks continued. The Sensex and the Nifty moved sideways, with a positive bias and ended the week around 2 per cent higher. Market experts waxing eloquent about structural bull market, mother of bull markets, and so on, appear to be attracting small investors by droves to the market. BSE Midcap Index gained 11 per cent while the BSE Smallcap Index gained 16. The weekly gains in some stocks were more than 50 per cent.

Increasing number of retail investors playing the stock market is borne by the cash volumes on the exchanges hitting record levels last week. NSE cash volume crossed ₹30,000 crore on the day the poll result was declared and in the next session.

This is the time to keep a cool head, folks. Do not follow your friend and buy dud stocks, which you could be left holding for the next five years. Stock prices are not going to run away anytime soon, going by their fundamentals. Market will provide many opportunities to enter in the future too. We are yet to hear the first set of policies from the new Government and we do not know who the next Finance Minister is going to be.

These two factors will be the near-time drivers for stocks. There could be a high degree of volatility this week as the derivative contracts of the May series roll into expiry. Those who do not like undue intra day gyrations can stay out of the market for a week. Open interest in the NSE derivative segment has risen to ₹228,000 crore, which means plenty of action is in store.

Oscillators on the daily chart are in the overbought zone. But that is not a cause for major worry since in a strong up-move oscillators tend to rise to bullish zones very soon and then stay there for a very long time. The strength in the weekly oscillators is something to cheer about. It means that the frontline indices have launched a fresh leg of the up-move.

The monthly candlestick chart of the Sensex is also an enchanting sight. We have not had such a bullish candlestick on the logarithmic chart since May 2009.

The Sensex took small steps higher through the week and finally closed at the highest point, indicating inherent strength.

The week ahead: Immediate resistance for the ongoing rally is at 24,751. The index has already reached that level.

We could see some downward movement next week as the index retracts to 24,116 or 23,742. Volatility could be intense if the index fails to move beyond last week’s high.

The medium-term: The trend is up. But if we project the target of the move from the 19,963 low, we get the first target at 25,106.

Since the Sensex has already achieved this target on the results day, there can be some struggle to move above this level.

Once the index manages to do so, the next targets are 26,227 and then 29,683.

Medium-term view stays positive as long as the index trades above 23,340.

The Nifty too is drifting higher at a slow pace.

The week ahead: Immediate resistance for the Nifty is at 7,423. Inability to move above this level will usher in some turbulence and the index can then retreat to 7,270 or 7,193 in the coming sessions. But a sharp move above 7,423 will mean that the Nifty is moving to 7,563 in the coming sessions.

The medium term: The view for the Nifty is also positive. If we extrapolate the move from 5,933, we get the first target at 7,524 and then next at 8,031. The Nifty has achieved the first target.

It can therefore bide its time, moving in the zone between 6,950 and 7,563 for a few more weeks. The medium- term view will reverse only on a strong close below 7,500. The medium-term target on strong close above 7,560 is 8,000.

Global markets extended their gains last week. The Thai turbulence does not appear to have affected global markets too greatly. The CBOE Volatility Index declined to 10.4 as investors in US equity markets drove their benchmarks to record highs.

The index is now nearing its record low of 9.8 hit in March 2013. A move above this will mean that a fresh leg of the long-term upmove is unfolding in the US as well.

Many of the indices in the US and the Europe are moving sideways at multi-year highs.

This reflects the potential for a break-out higher as investors are not allowing prices to move lower.

The Dow is moving in a band between 15,700 and 16,500 since this January.

We maintain the target of 17,109 once it gets past the 16,500 hurdle. The medium-term view will be roiled only if the index goes on to close below 15,300.

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