The Hindu Business Line : Index Outlook

It is generally believed that news moves markets. But E-wave analysts think otherwise. They believe that market makes its move first and the news ‘explaining’ the move is pulled out later from the stack of good and bad news that is always available in the market. The ostensible cause for the fall this time around was the weakness in global equity markets caused by the fears of tightening liquidity.

Thankfully, markets were circumspect right from the outset of last week, as reflected in the weak breadth and underperformance of the mid-caps and small-caps. Friday’s fall has merely scratched the Sensex. But the three dojis formed in the daily candlesticks charts reflect the struggle that the markets underwent to stay on firm ground. Momentum indicators in both the daily and weekly chart too imply that the cut has to get deeper before the medium-term trend turns negative.

The correction in our markets is just a day old. It would be premature to call a medium- term or intermediate-term trend reversal based on one day’s fall. However, the charts of some of the global indices are indicating that the move since June 2006 has been completed.

The Sensex is also charting the final or the fifth wave from June 2006 low. This wave has already achieved its second target at 15675. But it would be prudent to wait for a close below 14500 before ascertaining an intermediate term reversal. We will defer giving further downward targets until that happens.

The short-term trend has turned overtly negative in the index. The Sensex can slip lower towards 14922 or 14708 next week. A bounce from 14708 will imply that the bulls still stand a chance of staging a reversal. The resistance levels are at 15429 and then 15598.

Nifty (4445.2)

Nifty reversed from the resistance band between 4628 and 4650 that we had indicated last week. The ominous red candle formed on Friday implies that the index will struggle to get past 4510 or 4562 next week. Reversal from the first target would be an ideal juncture to short the Nifty with a stop at 4575.

The downward targets for the week are 4375 and then 4317. Strong near-term support exists at 4317 where perennial bulls can watch out for buying opportunity.

The medium term trend will turn negative on a close below 4317 and the next medium term target would be 4242.

Global Cues

Dow Jones Industrial Average moved below the 13800 level that we had indicated last week, thus turning the short-term trend down. The index is now tantalizingly poised at the medium-term trend deciding level of 13250. A step beyond this support will result in another 3 per cent fall to 12800. The other picture is much worse European indices such as CAC, DAX, MIBTEL and FTSE. FTSE has already retraced 38.2 per cent of the up-move recorded from June 2006 trough. Among the major Asian indices, Nikkei is currently the weakest.

Nymex crude is steadily rising towards the peak of $78.4. Thought there could be upheavals near the peak, the correction might not get deeper than $72. A fall below this level is needed to indicate the end of the party in crude prices. — Lokeshwarri S. K.

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