The Iraq crisis, weak monsoon and threat of higher inflation can cause turbulence

The Sensex and the Nifty moved one step lower from the lofty highs last week. While the decline is not deep enough to send alarm bells ringing, bulls need to watch their step. We could be in for a turbulent week ahead.

The odds are stacked high against the ongoing rally. The civil war in Iraq continues to rage, threatening to develop into a full-fledged war involving the US. President Obama’s statement that he is sending US military advisers to help Iraqi army and is prepared to take more action, does not lend comfort.

The impact of the Iraq crisis on the crude prices is making the rupee weaker, thus adding to the pressure on the stock prices. Brent crude moved above $115 on Thursday before cooling towards the weekend. The rupee too hit the low of 60.5 and is currently hovering ominously below 60.

Inflation worry is rearing its head again. Growth in Wholesale Price Inflation for May was at 6 per cent. The added impact of higher crude oil prices, below-normal monsoon and the cascading effect of freight price hike announced on Friday evening can make prices shoot higher across the board.

The futures and options expiry scheduled for this Thursday will also add its mite to the turbulence as traders book profits ahead of the expiry. It does not help that the benchmark indices are perched at life-time peaks and many stocks have rallied based on just hope. Net purchases by foreign portfolio investors have also reduced substantially over the past week, removing another buttress of the markets.

According to EPFR Global, India Equity Funds posted outflows last week, for the fourth time in the past six weeks. But provisional allocations data shows India’s average weighting among Global Emerging Markets (GEM) and Asia ex-Japan Equity Funds at or within striking distance of record highs.

We have yet another bearish candle on the weekly candlestick chart of the Sensex and the Nifty. The shooting star pattern in the weekly chart denotes selling pressure at higher levels. Weekly oscillators are dipping, but they continue in the positive zone.

The deterioration in the daily oscillators is sharper. Both the daily rate of change oscillator and the relative strength index are moving down sharply and are on the verge of getting into the negative zone. This means that the short-term trend is on the verge of reversing downward.

Sensex (25,105.5)

The Sensex moved to the intra-week high of 25,609.3 before sliding lower in the subsequent sessions.

The week ahead: The Sensex was range-bound last week. So our short-term view has not altered. The Sensex has supports at 24,930 and 24,788. Bounce from these levels will mean that the index can attempt another move to 25,609 and 25,736 in the coming week. But a close below 24,788 will make the near term view negative, paving the way for a decline to the next support at 24,163.

The medium-term: There is no alteration in the positive medium term trend. This trend will be threatened only on a close below 24,160.

The index faces strong medium term resistance around 25,500 and investors need to tread with caution till that level is breached. Next medium-term target is placed at 26,956 and 27,140.

Nifty (7,511.4)

The Nifty too spent last week moving sideways.

The week ahead: The Nifty has not breached the first support at 7,478, indicated in this column last week. Fresh short positions can be initiated on a strong break of this level. Next targets are 7,405 and 7,338.

Conversely, if the index does not decline below 7,478 in the early part of the week, it will attempt to rally to 7,663 or 7,700 this week. Target above 7,700 is 7,830. Fresh long positions should be avoided if the index declines below 7,342.

The medium term: The medium-term view for the Nifty stays positive. But traders need to exercise caution as long as the index trades below 7,700. Break above this level can take the Nifty to 8,071. Medium term view will turn negative only on a close below 7,051.

Global cues

Global markets recovered after the US Federal Reserve said that interest rates will be maintained at a low level in the near future. Most global indices closed the week in a positive note. Argentina’s Merval was the worst affected index, down 9 per cent on increasing fear of a debt default by that country.

European and American indices managed to hold on to their gains. The CBOE volatility index once again closed near 10.8 as the benchmark indices hit record highs.

But some profit-booking was evident in the Asian markets last week. Asian benchmarks, including the Seoul Composite Index, Philippines PSE Composite, Shanghai Composite, Straits Times Index and Jakarta Composite, gave up some gains.

(This article was published on June 21, 2014)
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