Teetering on the brink

It was an extremely bumpy ride for investors last week as stock prices whipped in both directions. The unease among investors was increased by the fact that the Sensex and the Nifty are hanging on to very critical levels from a technical perspective.

Both the indices are hovering below their 200 day moving averages and key Fibonacci supports at 18,500 in the Sensex and 5,600 in the Nifty.

The ostensible reason for the sell-off in the early part of the week was FIIs turning net sellers.

But it needs to be noted that these investors have net sold only $38 million in the secondary market in April.

Net purchase by foreign investors so far in 2013 is $8.4 billion in secondary and $1.9 billion in the primary market. That is, too much is being made of few days of pull-out by foreign investors.

The mid-week bounce on positive global cues was nullified by Infosys’ drab earnings that made the stock close almost 20 per cent lower, dragging the rest of the market with it. Industrial production growth at 0.6 per cent in February and consumer price inflation growing at 10.4 per cent in March were other negatives in that session.

The mood was however gung-ho in global markets with both the Dow Jones Industrial Average and the S&P 500 index moving to record highs.

The Cyprus overhang remains and can continue to affect sentiments in the weeks ahead as the IMF and the European Union have ruled out further help to the nation.

Another sidelight to the week’s trading was the fall of the bitcoins, a virtual currency, that had become a craze of late. The value of bitcoins crashed 70 per cent in just two sessions.

Investors will stay focused on corporate earnings next week as behemoths such as TCS, Reliance Industries and Wipro line up to announce results.

The wholesale price inflation numbers due next week will also be keenly watched.

The Sensex and the Nifty closed the week below the medium term trough formed last November.

This is a negative though investors can draw hope from the fact that the indices have not fallen sharply after breaching this support.

Both the indices have also reached the open gap that was formed last September. It will be interesting to see if this area provides any support to the indices.

Positive divergences in daily oscillators are indicating that the down-move is decelerating. Investors can therefore look forward to a short-term rebound.

The Sensex (18,242.5) closed the week just below its previous medium-term trough at 18,256.

The firm close below the Fibonacci support at 18,500 is of concern. But as explained last week, there are a couple of Elliott wave counts that converge in the 18,300 zone thus making it a good near term support.

If this level is breached, the index can decline to 17,873 or 17,761. The floor of the gap formed last September provides the support at 18,000.

If we consider simple Fibonacci retracement of the move from 15,748 to 20,203, we get the next supports at 18,000 and 17,460.

The long-term view will turn adverse only if the index goes on to close below 17,460.

Rallies in the near term will face resistance at 18,800 and 19,164. Short-term trend will remain negative as long as the Sensex trades below 19,000.

Since the Sensex has declined below the 18,500 level, a look at the long-term view is warranted.

Our view has been that one leg of a bull market that began in March 2009 was completed at 21,108 in November 2010.

The movement since then is a correction of this structural up-move. This correction is making the index vacillate between 15,000 and 21,000.

Within this corrective wave, the third part could have begun from the 20,203 peak.

According to this assumption, the Sensex can decline to at least 16,511. But if the index manages to hold above 18,000, it will mean that the Sensex can have another shy at 21,000 level this year before giving way.

Nifty (5,528.5)

The Nifty hit the intra-week low of 5,477 before closing 25 points lower over the previous week’s close. The concern on the technical front stems from the fact that the index has closed below its key Fibonacci support level at 5,600. Next Fibonacci supports for the index are at 5,450 and 5,246.

As explained last week, there is a convergence of targets around 5,520 level. The index is halting at this level currently.

If this level is breached strongly, the index can next slide to 5,450 or 5,388 level. Short-term resistance for the index will be at 5,610 and 5,650.

Traders can play short only as long as the index trades below the second resistance. The medium-term trend deciding zone is between 5,720 and 5,750.

As far as the long-term trend in the Nifty is concerned, the third wave of the correction from the 6,338 peak is unfolding currently.

Minimum downward target according to this count is 4,984. But if the index manages to hold above 5,300 in this bout of correction, it will keep open the possibility of a move higher to 6,000 again.

Global cues

Most global indices closed the week on a firm note. The European benchmarks, CAC, DAX and the FTSE managed to close with gains despite Cyprus casting its shadow on proceedings. CBOE volatility index declined slightly as the benchmarks in US went on to record highs.

The Dow soared past the 14,600 level that has been reining it in over the last four weeks.

It went on to close almost 300 points higher, a little short of the magical 15,000 mark. We retain the medium term targets at 15,400 and 15,700 for the Dow.

The key support level to watch would be at 14,000. Short-term trend will be threatened only on move below this level.

Gold fell to $1,477 an ounce on strengthening dollar and fear that Cyprus might offload gold held in its reserves as part of its bailout efforts.

The close below the support at $1,521 is worrying. But we stay with the view that the metal has strong support around $1,450 that occurs at 38.2 per cent retracement of the up-move from the October 2008 low.

If we extrapolate the down-move from the $1,920 peak, we get the next target at $1,402. In other words, the band between $1,400 and $1,450 is critical support level for the yellow metal in the days ahead.

>lokeshwarri.sk@thehindu.co.in

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