It was the best of weeks, and it was the worst of weeks. Indian benchmark indices soared to record highs on Thursday only to plummet lower in the next session as the two central bankers, Ben Bernanke and Raghuram Rajan decided to act in unpredictable ways. The Federal Reserve Chairman chose not to begin the tapering of quantitative easing after spooking equity, forex and debt market over the past four months with the impending reduction in liquidity.
The RBI governor decided to follow his US counterpart in springing a surprise on the market, only this was a more unpalatable one. While he did decrease short-term interest rates, he went on to increase the repo rate by 25 basis points, pegging back corporate India’s recovery prospects. Market gave a thumbs-down to the RBI’s credit policy with the Sensex ending 383 points lower on Friday and the Nifty losing 103 points.
But the end of the September FOMC meeting does not mean that the worst is behind us.
The tapering is expected by the end of this calendar. Further, the US parliament has to take a decision on increasing its debt ceiling by mid-October or the US government faces a shutdown.
Corporate score card due in October will be far from cheerful with the impact of rupee depreciation taking a toll on already bruised corporate bottom-lines.
Of course, the stock market can also do the unexpected and continue moving higher.
But that seems extremely unlikely and such a rally is not likely to sustain. So, October promises to live up to its reputation and give us some turbulence after a very benign September.
That the Sensex and Nifty have reached the upper end of their long-term trading range also makes this scenario possible.
The week ahead promises to be quite interesting with the September derivative contracts set to expire on Thursday.
High put-call ratio implies that the index is overbought at this juncture. The outcome of German elections, Markit’s PMI data and FII flows will be the key metrics that investors would be watching next week.
Oscillators in the daily chart are still pointing upward. But many of them have reached the extremely over-bought zone.
Weekly oscillators however continue to move sideways implying that the Sensex and the Nifty continue in their medium-term trading band.
Negative divergence in the monthly oscillators also means that there is lack of momentum over the long-term time frame.
The Sensex opened with a gap and jumped to an intra-day peak of 20,739 on Thursday. But the large black candlestick formed in the next session has almost negated the positive short-term trend. Resistances for the early part of the week are at 20,480 and 20,740. Inability to move above the first resistance will mean that the index can move lower to 20,051 or 19,500 over the coming sessions.
The short-term trend will remain positive as long as the index trades above 19,500. Decline below 19,500 will mean that the index is heading towards 19,100 or 18,700.
As far as the medium-term trend is concerned, the Sensex was moving in a sideways band between 18,000 and 20,500 since the beginning of this year. The decline in August dragged the index to the low of 17,448 that is close to the 61.8 per cent retracement of the long-term up-move from the December 2011 low. Typically deep corrections such as these are short in duration and do not extend over long periods. If we assume that the correction has ended at the August low of 17,448, the next long-term wave upward has the targets of 20,729 and then 22,758.
The Sensex has already achieved the first target, so a medium term top could already be in place. The entire zone between 20,700 and 21,100 is a potential minefield for the index. But a sharp move beyond the life-time peak will take the index towards 22,758.
Key long-term support for the index remains at 17,000.
The Nifty has also begun a short-term correction on Friday. Immediate resistances for the index are at 6,063 and 6,142. Inability to move above 6063 will be the cue for short-term traders to take fresh short positions in the index with stop loss at 6,080. Downward targets are 5932, 5798 and 5750.
Bulls can continue to buy on declines as long as the index trades above 5,750.
Decline below this level will mean that the index is heading towards 5,631 and 5,511. The 200-day moving average at 5,844 and the 50-day moving average at 5,723 will also offer support to the index in the sessions ahead.
We are still in the process of determining the medium-term trajectory for the index.
The index retraced more than 61.8 per cent of its rally from the December 2011-low when it hit the August low of 5,119. This qualifies as long-term correction. If we project the third leg of this long-term up-move, we get the targets of 6,168 and then 6,817. Since the Nifty almost achieved the first target last week, it is possible that we have a medium-term peak in place now. The index can now reverse to move down to 5,500 or 5,100 again.
The zone between 6,100 and 6,300 provides strong resistance for the index. But if this zone is crossed, the next target would be 6,817.
Most global markets moved higher in the initial part of the week but gave up gains towards the weekend.
Relief at the Fed deciding to postpone its QE tapering made the CBOE volatility index move to the low of 12.5. European indices such as the CAC and the DAX put up a strong show ahead of the German elections.
The Dow hit a new life-time high at 15,709 on Wednesday before developing a touch of vertigo and moving lower. Immediate supports to watch out for now are at 15,350 and 15,100. If the index remains above the first support, it will mean that it can move on to a new high soon.
Decline below the second support is required to make the short-term view negative. Many of the emerging markets in Asia too moved higher last week. Benchmarks of Philippines, Indonesia, Malaysia recorded strong gains.