Investors need to tread cautiously as indices near long-term peak levels. Reversal from here can cause a sharp pull-back.
Optimism bubbled, frothed and brimmed over in the equity markets last week helping the Sensex scale the 20,000 peak .
The ongoing festive cheer in the country appears to have spilled over into the equity market, even as the list of concerns keeps growing longer.
But as the adage goes, “the ticker is always right”. There is no point in fighting the market as it is known to display amazing prescience at times.
The best strategy would, therefore, be to play with the trend and not agonise over how the market is overlooking the negatives.
The lower trade deficit and current account deficit gave a boost to stock prices in the early part of the week. The rupee that went from strength to strength, also helped improve sentiment. The Indian currency gained 2.5 per cent in the last two weeks.
There was, however, no dearth of negatives. IMF pegged down India’s economic growth for 2013 to 3.8 per cent. Industrial production numbers were abysmal.
The US government employees seem to be enjoying an extended holiday as the shut-down continues. There seems to be no resolution in sight regarding the US debt ceiling either.
Volumes were not too high and market participants appeared edgy. Foreign institutional investors were net buyers through last week.
High put-call ratio implies that the market is reaching overbought region.
The truncated week ahead promises to be quite interesting. It needs to be seen if US Congress relents to raise the debt ceiling by October 17. Wholesale price inflation numbers and the slew of quarterly earnings will be keenly watched and will set the tone for the week’s trading.
The Sensex broke past the resistance at 20,180, thus clearing the way for a move towards 20,740. Reversal below this level will result in the index moving sideways in the band between 19,300 and 20,700 for few more weeks.
But a clean break above 20,740 will result in the index moving higher to 21,108 and beyond that to 21,297.
It is, however, quite likely that the index may decline to 20,074 or 19,760 next week. Short-term trend will reverse lower only on a strong move below 19,760. Subsequent targets are at 19,265 and 19,100. The action of the index next week will determine the medium-term trajectory. As explained earlier, failure to move beyond 20,180 will keep open the possibility of a decline to 17,200 or below.
The Nifty rallied above the short-term resistance at 5,976 and went on to record the intra-week peak at 6,107. Now that the index has moved close to its previous peak at 6,142, traders need to watch their step.
Failure to record a strong break above 6,142 level will result in the index declining to 5,952 or 5,857 in the days ahead.
Short-term traders should close their long positions on a close below 5,952. But the short-term trend will reverse lower only if the index breaches 5,857.
Subsequent targets are 5,701 and 5,633.
The medium-term trend in the index is expected to be more apparent after observing next week’s trading. A sharp move above 6,142 will give way to the next target at 6,332. On the other hand, a decline below 5,500 will drag the index lower to 5,150, or lower.
Global cues: Despite the debt ceiling drama, global stocks held their ground and managed to close the week in positive territory.
European stock markets had a strong week with the DJ Euro STOXX 50 closing almost 2 per cent higher last week. CBOE volatility index spiked to the highest level in the last three months on Wednesday.
But the index eased towards the end of the week on hopes that talks between Parliamentarians will help defuse the debt ceiling crisis.
The Dow declined to the intra-week low of 14,719, but recovered smartly after that to end the week 164 points higher. Immediate resistance for the index is at 15,334. Break above this level can take the index to 15,709.