Positive developments locally and optimistic global sentiments cheered the Sensex and pushed it by a solid 439 points or 2.6 per cent on Friday, its biggest single-day rise this year . Developments such as the Prime Minister taking charge of the Finance Ministry, declining Brent crude and valuations at record lows provided positive cues to the domestic market.

As the Euro-zone leaders agreed to relax conditions on emergency loans for Spanish banks and also on a possible support for Italy, , the S&P 500 gained 2.5 per cent, its biggest rally in 2012. Also in the US the economic reports released on June 27 showed durable-goods orders and pending home sales beat economists’ forecasts. This data has sent signals that the housing market is recovering from the slump.

The first half of 2012 ended gainfully as the Sensex and Nifty rose 13 per cent and 14 per cent respectively.

In the previous week, both the Sensex and the Nifty were up just mildly in the earlier part until Friday’s massive rally. June derivative contracts expiry day was normal and the indices closed marginally on a positive note. As the stocks witnessed strong rally on Friday, the turnover in both cash and derivative segment increased. FII inflows improved after Morgan Stanley upgraded the Indian stock market to “equal-weight” after being in a “underweight” position since the first quarter of 2011. This upgrade comes after Deutsche Bank and J.P.Morgan upgraded Indian stocks to “overweight” from “neutral”.

The rupee jumped to 55.6, advancing 3.1 per cent on Friday, its biggest daily increase in three years. Along with it, other Asian currencies strengthened this week. The central bank announced on June 25 that it will raise the ceiling for foreign investment in government bonds by $5 billion and allow companies that earn foreign exchange to borrow abroad to repay rupee loans.

Last week’s late rally appears to have reinforced the bullish momentum as the benchmark indices inch higher, strongly surpassing key levels. Both the indices are hovering well above the 50- and 200-day moving averages (DMA) signalling positive cue for the ensuing weeks.

Both the daily rate of change oscillator and the moving average convergence divergence oscillator are featuring in the positive territory implying upward momentum.

The daily relative strength index is also hovering in the bullish zone. The weekly oscillators are on the brink of moving in to positive terrain whereas the monthly oscillators have entered this terrain, which indicates that the medium-term term outlook for the indices is turning bullish.

Sensex (17,429.9)

After lacklustre sideways trading till Friday, the Sensex jumped 2.6 per cent and emphatically broke through the key psychological resistance at 17,000. With this rally, the running correction appears to have come to an end. In line with our expectation, the index advanced and achieved our initial target of 17,343 and is nearing our second target of 17,467. Short-term outlook is bullish and target above 17,467 is at 17,781. However, the index is likely to face strong resistance at around 17,500; investors and short-term traders should tread with caution in this area.

As long as the index trades above 16,550, its short-term stance will remain positive. Investors with short-term perspective can continue to buy as long as the index trades above the aforesaid level. Nevertheless, a decline below this level will imply a fall to 16,400 and 16,245.

The index is currently facing an important resistance in the band between 17,467 and 17,500. A strong up move above this resistance will lift the index higher to 17,781 as mentioned and the key resistance zone above this level is at 17,920 and 18,000 in the weeks ahead. Key supports to watch are at 17,135, 17,000 and 16,800.

Nifty (5,278.9)

This index too rallied strongly on Friday, conclusively breaching resistance at 5,150. Short-term trend is up for the index since its early June low at 4,770. But it is facing key resistance at 5,300 which short-term traders should look out for. Strong upward breach of this level will lift the index higher to 5,406. Subsequent key resistance is in the zone between 5,464 and 5,500. As long as the index trades above 5,030, traders can continue to buy in declines. However, a fall below 5,030 will mar the short-term uptrend. Next key supports are at 4,980 and 4,930.

Near-term supports to watch out are at 5,191, 5,150 and 5,050.

Global Notes

Worldwide, stocks gained a positive momentum as cues started flowing from the Euro-zone, US economic data and Euro gaining against the dollar. CBOE volatility index fell below the 20 mark to finish at 17 on Friday, after initially hovering above the 20 level which signals that investors are more complacent. The Dow added almost 2 per cent in the week, strongly moving above the resistance at 12,810. Since early June low at 12,035, the index has been on a short-term uptrend. If the index stays above its important support at 12,500 in the forthcoming weeks, a rally to 13,339 is possible with a minor pause at around 13,100 levels in the medium-term.

Among commodities, gold closed higher by $26.6 an ounce last week to end at $1,598.2. Light crude jumped $5.2 or 6.5 per cent to $84.9 a barrel. Light crude is reversing higher from the key support at $80. In the short-term it can test resistances at $88 and then at $91.

yoganand@thehindu.co.in

(This article was published on June 30, 2012)
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