The Hindu Business Line : Index Outlook

In 2005, the Sensex broke free of the shackles that bound it to the sub-6000 level and began a tentative flight upward. In 2006, Indian markets discovered that sky is the limit. Milestones were crossed effortlessly and corrections were taken in the stride in a year in which the Sensex crossed the five-figure mark for the first time in its history and closed above it convincingly.

It was the capital goods sector that powered the Sensex forward, with a 56 per cent gain in 2006. Other significant sectoral gainers were banking, IT, metal and oil and gas. The BSE Midcap Index underperformed the Sensex with a 31 per cent gain. The disappointment was the BSE Smallcap index, which closed just 15 per cent higher.

The year 2006 will also be remembered as a year in which retail investor plunged headlong into the unknown depths of the derivatives segment, only to reap the consequences in the May crash. This uninhibited speculation in derivatives by novice traders is one of the major concerns that is spilling over into 2007. We are beginning the January series, fairly heavy, with the open interest above Rs 40,000 crore.

The medium-term trend in the Sensex is currently moving sideways. Another four-day trading week for markets could see the Sensex struggling with its previous all-time high. We expect the correction that began at 14047 to launch into its third leg downward, as the Sensex charts a sideways moving flat pattern. We can see the Sensex moving lower to 13140 or 12665 in the third leg of this correction.

Intermittent support for the Sensex will be available at 13140, where the 50-day moving average is positioned and at 13250, where the medium-term trend line is present. On the higher side, any attempt at rallying can be capped at 14075 next week.

Nifty (3966.4)

The Nifty, too, is expected to move in a broad sideways range between 4050 and 3600 for a few weeks before the next impulse wave unfolds.

Failure to rally above 4000 early next week will see the Nifty losing steam and heading for the medium-term targets of 3756 and then 3603. The 50-day EMA at 3833 will provide some short-term support.

Resistance levels to watch for next week are 4011, 4043 and then 4080.

Global Cues

It has been a strong year for most of the global markets despite the deep crevasse that was made in May and June. The DJIA gained 16.4 per cent in 2006, while the Nasdaq was higher by 9.6 per cent. Strongest gainers were Latin American countries such as Venezuela and Peru. Among Asian markets, China and India walk away with the honours.

The first half of the year saw a vertical climb in commodity prices. Crude, copper, aluminium and gold rallied together taking the equity markets along with them. This was also accompanied by interest rate hikes by central bankers across the globe. Such a positive correlation between equity markets, commodity prices and interest rates defied conventional logic.

But sanity returned in the second half of 2006, as commodity prices cooled down and the central banks across the globe paused their interest rate hikes, giving equity markets a more sound reason to move higher.

(Note: The analysis and opinion expressed in these columns are based on the technical analysis of the past price behaviour. Opinion and price targets are based on the Elliott Wave Analysis. The stop-loss level provided with the recommendation is important. The original view would stand negated if the stop-loss level is breached. There is a risk of loss in trading)

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