We had expected a volatile time for Indian equities in 2013 with our yearly range for Sensex between 17,000 and 22,000. The benchmark is moving within this range, but the movement is far from sedate or soothing. The chart of Sensex and Nifty plotted from January could be mistaken for a roller-coaster ride in a fun-park, with wild plunges and exhilarating climbs. And after all this gyration, the Sensex and Nifty are still at the same spot where they began this year.
The movement last week was no less exciting with the Sensex threatening to decline below 18,400 in the early half of the week only to soar merrily towards weekend. Market participants found reason to cheer in the current account deficit reducing in the March quarter from the record high hit in the previous quarter. The ripple of relief generated by this news turned in to a loud cheer as the government announced its gas price and energy sector reforms.
The derivative expiry on Thursday could also have aided the turnaround since many in the market were betting on further slide in prices and were holding short positions. Volumes in cash segment spiked higher towards weekend. Derivative turnover crossed Rs 3,00,000 crore on the day the June contracts rolled into expiry.
The FII pull-out in equity and debt continued despite the buoyancy in market mood towards weekend. They have pulled out $1.8 billion worth of equity in June and outflow from debt is $7.5 billion. The net outflow of FII funds from debt has risen to $1.1 billion this year.
Oscillators in the daily chart are moving up sharply from the oversold zone. Rate of change oscillator moved to 1.8 while relative strength index moved to 53, just entering the positive zone.
These are early signs of short-term trend reversal but we need to see the action next week to confirm this. The weekly oscillators continue to hold in the neutral zone, leaving open the possibility of a move in either direction.
Sensex ricocheted on Thursday and Friday to end the week 621 points higher. The bullish engulfing candle in the weekly chart is a positive. That the index has closed above both the 50 and 200 day moving averages is also something to feel pleased about.
The Sensex is reversing higher from significant medium-term support. The index has an important support zone in the band between 18,000 and 18,500. As long as this zone holds, there is the possibility of a sideways movement in the range of 18,000 and 21,000 for some months before the index breaks higher.
It is only on a break below 18,000 that a decline to 17,540 or 17,160 becomes possible.
For the week ahead, investors should watch out for the hurdle around 19,688. Sensex needs to move above this level to signal that it is on course to test its recent high at 20,443.
If the week starts on a wobbly note with the index unable to clear the hurdle, there can be decline to 18,950 or 18,460. Target on decline below 18,460 is 18,210.
The Nifty too is halting at critical support level. 38.2 per cent retracement of the entire move from 4531 to 6112 occurs at 5580. The index reversed just below this level at 5566 last week. If this level holds, it will imply that the medium term trend remains up for the index. It can fluctuate in the zone between 5500 and 6200 for few more months before breaking higher.
It is only on a strong breach of the 5500 level that the medium term trend will turn adverse signaling future decline to 5380 or 5180.
For the week ahead, the ongoing rally can extend to 5910 or 5976. Inability to move above the second hurdle will be the cue for traders to go short with stop loss at 6050. The index needs to record a strong move above 6000 to signal that it is on course towards its previous high at 6230.
A wobbly start to the week will mean that the index will decline to 5676 or 5567 in the sessions ahead. Break below 5567 can take the index to 5477 or 5441.
Most global benchmarks closed slightly higher last week, helping erase some of the losses recorded in June. The CBOE volatility index reversed from the resistance around 22 indicated last week. This implies that the short-term trend has not turned adverse yet.
The Dow declined below the short-term support at 14,877. But it reversed a little lower from the intra-week low at 14,551. The medium-term trend will turn negative only if the index goes on to record a strong weekly close below 14,356.
The medium-term view will turn negative only if the index goes on to record a strong weekly close below this level.
It is possible that the index spends some more time in the band between 14,350 and 15,500 before breaking higher to 16,500.
The rebound in Nikkei for second consecutive week is also a positive for global investors who have bet heavily on Japanese equities since the beginning of this year. It could attempt to get close to 14,000 level where a significant hurdle is present. This level needs to be crossed before the index can eye the recent peak at 16,000.
The dollar index climbing above 82 level is a cause for worry. This spells trouble for gold and the rupee. This index does face strong resistance in the band between 83 and 85. Reversal from here can keep the index in the band between 79 and 84 for some more time. But break above 85 will mean that the index can move towards 89.