The Hindu Business Line : Index Outlook

The insuperable air sported by Sensex at the end of last week gave way to uncertainty as it was swept lower along with the rest of the global indices. Market derives this vicious pleasure in reversing only after it has lured in as many naïve investors as possible and when the last of the fence sitters have jumped in to the ring.

Escalating open interest remains a cause for worry since it has the potential to exacerbate a fall, as witnessed last May. Fresh short positions created in the index futures by FIIs are one factor that can aid the market's recovery. Among the sectoral indices, FMCG, consumer durables and autos led the rout. IT stocks hold the trump card that can help the bulls to regain control.

Sensex made no attempt to create a record high last week. The momentum indicators in the daily chart are signalling weakness in the short-term. But it is a little too early to draw an inference regarding the medium term.

The 500-point correction last week signals the completion of a zigzag from the trough at 12425. The intra-week low of 14010 is 30 per cent retracement of this up-move. In other words, the minimum retracement requirement for this correction has been met. A fight-back is possible from these levels.

If Sensex slips below 14000, the next support is available in the zone around 13820. The medium term trend will turn irrefutably down only if it slips below 13820.

Should Sensex bounce back from 13820 or 14000 next week, it will move higher to 14267 or 14426. But failure to rally past 14450 would imply that the correction would have more legs and Sensex can slip lower towards 13200 or 12425.

To elucidate, Sensex can try to stabilise above 13820 next week. If it does so, then the medium term outlook will stay positive. Move below this level will imply the continuation of the move that began from the 14723-peak and Sensex can then move lower to 13200 or 12425.

Nifty (4145)

Nifty achieved our first short-term target last Monday and reversed from there. A three-part move seems to be complete from the 3617 low. The retracement targets for this correction are 4140, 4078, 3990 and then 3901. Nifty has already achieved the first target and a reversal is possible here. A step lower, Nifty will find support at 4078, where the 50-day moving average is positioned as well.

Traders can hold their longs with a stop at 4065. A reversal can take Nifty higher to 4197, 4216 or 4272. Reversal from either of these levels should be a cue to unwind longs and to initiate fresh short positions. Rally past 4272 will mean that Nifty is heading towards a new high again.

Fall below 4078 will signal that Nifty can slide to 3901 or 3861.

Global Cues

The much-awaited correction in the global equities finally materialised last week. Reversal patterns in weekly charts of most indices suggest that this is a correction of the move that commenced from the March lows.

Friday's recovery in DJIA needs to sustain and take the index past 13530 to make the outlook neutral again. Else a slide towards 13000 will be on the cards. The chart of Nasdaq Composite is relatively stronger and last week's fall seems to be a part of a sideways moving expanding triangle. The graph of S&P 500 is in the fourth wave of the move from March lows. The fifth wave can make another attempt at a new high.

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