The Hindu Business Line : Index Outlook

Indian markets are in an indefatigable mood. Though the Sensex grappled with the psychological resistance at 12000 in the first half of the week, it went on to end the week with a gain of 1.8 per cent.

A parallel can be drawn between the rise in the Sensex since the recent low of 9875 and the rise witnessed from the low of 7656 in October 2005. Both rallies are marked by shallow corrections that did not exceed 38.2 per cent of the previous moves, the short-term momentum indicators diverged negatively and large build-up of short positions by FIIs and traders helped to sustain the rally. The lesson to be learnt here: do not short the market before a peak is confirmed.

As we near the expiry of the September contracts in the derivatives segment, the Sensex is expected to remain volatile as the large build-up in open interest gets unwound or rolled over.

The third leg of the upward move from the low of 8800 in the Sensex has successfully crossed its second target of 12015. As we have been reiterating, the entire rally from the low of 8800 is the B wave or a pullback of the fall from 12671. The B wave can go all the way to the beginning of the A wave (12671) or even further.

If we consider the minor counts of the move since the low of 9875 in the Sensex, a zigzag formation was completed at 11551. There was a x wave after this move that terminated at 11297. We had expected a flat formation from 11297 that would end around 12150. But the move past 12200 leads us to believe that the Sensex could be charting a triangle from the low of 11297. This could be the terminal corrective formation that can take the markets higher but with increasing bouts of instability.

To put it simply, the Sensex is expected to move higher, but volatility will increase as the index nears the previous high. The Sensex can move higher to 12455 and then to 12556 this week. The positive outlook for the short term will reverse only if the Sensex falls below 12000.

Traders can play long with tight stops. Investors should remain stock-specific and buying should be done with a long-term perspective only. It would be best to avoid frontline stocks that have run up steeply in the last two months. Switching part of your portfolio to low-risk fixed return investments is also a good strategy at this juncture.

Nifty (3544)

The Nifty surpassed the resistance at 3500 last week to touch an intra-week high of 3562.4. It closed the week with a gain of 1.8 per cent. The Nifty breached the 3520 level, which we had expected would terminate the current rally. The revised counts for the Nifty are same as that presented for the Sensex. The short-term outlook for the Nifty would stay positive as long as it stays above 3473. Traders can play long on the Nifty with a stop at 3470. The upper targets this week are 3585 and then 3605.

BSE Midcap Index (5043.8)

It was a range-bound week for the BSE Midcap index. This index closed with a loss of 0.5 per cent for the week. The short- and medium-term outlook for this index are, however, positive. The chart is moving sideways is what seems like a consolidation move just above its long-term moving average. The index can move higher to 5093 or 5196 in the short term. The outlook will stay positive till the index stays above 4822.

Lokeshwarri S. K.

More Stories on : Technical Analysis | Stock Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page