Index Outlook. Odds tilted in favour of bears

It was a very disappointing show by the stock market last week. Bulls were in retreat as a selling fury was unleashed across global markets on Tuesday.

Both the Sensex and the Nifty caved in, signalling that the path of least resistance has now turned downwards. Despite the recovery in the later part of the week, the short-term trend is tilted in favour of the bears now.

It is not as if anything changed for the worse overnight. Crude continued plumbing new depths causing a fresh wave of concern on its effect on global growth and demand. The problem economies of the Euro zone and their debt issues moved back in to the limelight, this time with concern on Greece. It was finally left to the central bankers to make comforting noises about another round of stimulus to assuage market sentiments.

The continuing fall in the price of crude is disconcerting. But as explained earlier, the commodity had critical support at $65 on the chart, the Fibonacci support (61.8 per cent) of the rally from 2009-low. Once that level was breached, the stage was set for a plunge to the low at $33.

The critical 61.8 per cent retracement is being tested in yet another commodity — gold. It is currently attempting to build a base around $1,155, the 61.8 per cent retracement of the rally from October 2008-low.

This level has been tested thrice since June 2013. Breach of this buttress can be pretty bad for the yellow metal.

The severity of Tuesday’s sell-off in India signals intense nervousness among investors who have purchased stocks in recent months. They are likely to head for the exit at the mere hint of a reversal. Foreign portfolio investors too turned net sellers last week.

As the December quarter earnings start flowing in, investors will turn their attention to number crunching again. We will also get indications about the state of the economy once the industrial production and consumer price inflation numbers are released next week.

Sensex (27,458.4) The Sensex reversed lower on Monday to hit the intra-week low at 26,776.

The week ahead: The failure to move beyond the 28,000 mark last week is very disappointing. The recovery in the later part of the week was far from satisfying and the short-term prospects for the Sensex continue to be under a cloud. Immediate resistance for the index is at 27,610 and then at 27,793 (50 DMA).

The failure to move above this level will result in the index moving lower to 26,776 or 26,512 in the coming sessions.

On the other hand, a strong close above 28,000 will make the short-term view positive, paving the way for a rally to 28,731.

Medium-term trend: We were expecting the formation of a diagonal triangle since August 8. The Elliott wave of this move was expected to take the index to a new high.

But the movement last week has put this count in jeopardy and opens the door for completion of a running correction at the December 4-peak. A strong close below 26,469 is needed to confirm this count. Downward targets in that case will be 25,726 and 24,500. Since the 200-DMA is also poised at the second target, we can look forward to some support at this level.

Nifty (8,284) The Nifty too could not make a strong break beyond the 8,400 hurdle indicated last week.

The week ahead: The Nifty needs to move back above 8,445 this week to signal the reversal in the short-term trend. It can then move on to the previous peak at 8,626.

However, if Nifty reverses lower before moving above the 50-DMA at 8,329, it will mean that the index can move lower to 8,031 or 7,776. Presence of the 200-DMA at 7,700 also makes it a critical medium-term support.

Medium-term trend: The medium-term trend in the index is positive. But it will be under threat if the Nifty goes on to close below 8,000. It will also shut the possibility of the index rising to a new high in the immediate future.

Global cues It was a very volatile week for most global markets. Indices whipsawed in both directions before ending the week with marginal losses.

The CBOE volatility index moved close to 23, but ended the week much lower at 17, following the recovery in the second part of the week.

The Dow appeared to be about to launch a deep correction but it recovered from the low of 17,262, much above the key support at 17,185.

It will be interesting to see if the index is able to move above its recent peak at 18,103. Else, the index will continue to vacillate in the zone of 17,000 and 18,100.

Asian benchmarks such as the PSE Composite and Shanghai Composite Index however continued moving higher.

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