The holiday splattered week had little by way of market-moving news. Decline in headline inflation lent cheer as hopes of another policy rate cut rose. The benchmarks managed to inch higher with the Sensex managing to surpass its recent peak at 17,631. The Nifty, too, flirted with the 5,400-level before closing slightly lower.
Cash volumes improved in the second part of the week. Derivative volume on the NSE also rose sharply to cross Rs 1,25,000 crore on Friday. FIIs were net buyers through the week, taking their tally for this month to over $1 billion. Net FII inflow for the year has now crossed $11.3 billion; flows into debt instruments have crossed $4.7 billion.
There is a marked reduction in risk-aversion globally with the euro-zone crisis taking the back-seat, albeit for a week. The CBOE volatility index declining to new multi-year low and the S&P 500 index rising to the highest level since May 2008 implies that investors in the US are feeling rather gung-ho.
Empirical studies show that perceived reduction in global risk results in improved fund flows into emerging markets. This is already translating into improved flows into the Indian equity market.
Oscillators in the daily chart are holding in the positive zone. The relative strength index in the daily chart has moved to the overbought zone implying that the current short-term uptrend is getting over-heated. Weekly oscillators are also rising denoting that the medium-term trend stays positive for the Sensex and the Nifty.
The Sensex managed to close 133 points higher last week. The index has also closed higher for the third consecutive week forming three white soldiers in the weekly candlestick chart. This is one of the bullish formations and can be followed by a sharp upward break-out. That the index has closed above the recent peak at 17,631 is also a positive.
The medium-term trend in the index is sideways in the broad band between 15,500 and 19,000. A three-wave pattern appears to be unfolding in the index from the December low of 15,135. The third leg of this pattern that is in motion now has the targets of 17,842, 19,136 and 20,430.
Since the index has strong resistance around 18,826 that occurs at 61.8 per cent retracement of the decline from 21,108 peak, this rally could halt in the zone around 19,000.
Medium-term view for the index will stay positive as long as it trades above 17,000.
Short-term trend in the Sensex is up since the low of 16,598. This uptrend is however losing momentum and the index is moving sideways with an upward bias since August 8. Break above 17,800 in the early part of the week will result in the index moving up to 18,319 or 18,480.
It is, however, possible that there is a slight correction in the days ahead to 17,471, 17,356 or 17,216. Short-term view will stay positive as long as the index trades above 17,356.
The Nifty (5,366.3) closed 46 points higher to close at a five-month high. If the current up-move is the C wave of the formation from December 2011 low, the wave has the targets of 5,450, 5,870 and then 6,290. Since the index is nearing the first target, traders should tread a little warily. But move beyond this level will take the index to the long-term resistance zone around 5,665. Medium-term trend will stay positive as long as the index trades above 5,010.
Short-term trend in the index is also up. But it is losing momentum over the last two trading sessions. A minor dip in the early part of the week can pull the index down to 5,294 and then 5,260. Traders can hold their longs with stop at 5,280.
Strong break above 5,400 can pull the index to 5,450 or 5,507.
It was a strong week for the European and the US markets. Indices in these regions continued moving higher. That there were no further negative tidings out of Europe helped the European indices close higher. US stocks have recorded the sixth straight week of gains.
CBOE Volatility Index declined to the lowest level since March to close the week at 13.4. This is a long-term support for the index. Any further decline will mean that the index can move lower to the 2006-2007 low at 10. That would usher in a raging bull-market, as far as sentiment goes.
The Dow continued moving higher to hit the intra-week peak at 13,281.3. It can face minor resistance as it approaches the previous peak at 13,339. But break beyond this level will take the index to 13,780, 13,848 and 14,198. Short-term view will stay positive as long as the index trades above 12,700.