The brave trudge in stock prices was brought to an abrupt halt at the 18,000 peak in the Sensex and 5,450 level in the Nifty. The Nifty slipped 128 points while the Sensex fell 353 points last week. Doubts that the rally is not justified on fundamental grounds, sluggish growth in June GDP numbers and some gloomy statements from the RBI Governor contributed to pushing stock prices lower.
Expiry of August derivative contracts on Thursday added to the volatility. Index put call ratio has declined below one implying that the bears were caught on the wrong foot in this settlement. Global cues were largely benign with investors looking at the actions of various central banks to judge the trajectory in equity prices.
Volumes in the cash segment improved in the later part of the week. Derivative turnover on the NSE was at record high of over Rs 2,50,000 crore on the day of the derivative expiry. Foreign institutional investors were net buyers in equity through the week.
Stocks are likely to find it a struggle to move higher from these levels as the mounting pile of negatives is hard to sweep under the carpet. Oscillators in the daily chart have declined from the overbought zone in to the bearish zone, denoting a reversal in the short-term uptrend. Weekly oscillators are also dipping though they continue to be in the bullish region.
A look at the monthly chart of the Sensex is necessary to show us where we are from a long-term perspective. The index is shackled in a wide-trading band between 15,500 and 18,500 since the beginning of 2012. This move appears to be part of the long-term correction that began from the 21,108 peak. Since the up-moves within this correction are moving close to the 61.8 per cent retracement, this could be a triangle or double three in the making. As is wont with corrective sideways moves, the pattern is not apparent until it is complete.
But the most plausible count now points towards the action getting narrower in the months ahead, probably between 16,000 and 18,000 before the index forms a long-term bottom. The index needs to record a strong close below 15,500 to negate this view.
For the short-term, we have been reiterating that there is a convergence of targets around 18,000 in the Sensex. Reversal from this zone could imply that the move from 15,748 is now complete. But the index will need to record a strong close below 17,000 to confirm this. Subsequent medium-term supports are 16,770 and 16,528.
Short-term resistances for the index will be at 17,734 and 17,973. Targets on sharp move beyond 17,972 would be 18,121 and 18,319.
The Nifty too recorded a long black candle in the weekly chart that completed an evening star pattern. This is a reversal pattern but we need confirmation from next week’s action. Short-term supports for the index are at 5,190 and 5,032. Short-term traders can hold their long positions as long as the index trades above the first support.
Reversal from this level can take the index higher to 5,367 or 5,448 in the short-term. Target on a strong move beyond 5,450 is 5,606.
The area around 5,200 is also a strong medium-term support for the Nifty. Supports on move below this level are 5,111 and 5,032.
Global equity markets took a small step lower last week. Absence of any major news development made investors focus on Ben Bernanke’s speech in Jackson Hole towards the weekend. The Federal Reserve Chairman’s promise that he would do all he could to support the market appeased investors. This led to expectation that there could be another round of quantitative easing in the offing.
CBOE VIX moved to 18 as risk aversion rose last week. The Dow declined to the intra-week low of 12,979 before reversing slightly on Friday. We stay with the view that short-term supports stay at 12,800 and 12,500. Short-term trend will reverse only on a close below the first support. But as explained earlier, it is possible that the current decline pulls the index all the way down to 12,500 or even 12,000 as the index moves in to a medium-term consolidation range.
The dollar index declined further and this helped gold move to $1,691 by the end of the week. Gold had short-term resistance at $1,675. Since the metal has moved beyond this hurdle, it can move on to $1,720 or $1,770 in the upcoming weeks. Medium-term trend will turn positive only on strong move beyond $1,770, paving the way for a rally to a new high.