The Hindu Business Line : Index Outlook

The capricious ways of the stock markets were amply on display last week. Instead of preparing for the 16K celebrations, market participants were fighting with their backs to the wall, defending 15000. They managed to pull the Sensex back from the brink and had it safely propped above 15000 when the week drew to a close.

The number of fence-sitters increased as volumes took a dive and investors decided to bide their time until the correction ended. Barring Wednesday, there was no panic evident in the market. The derivative open interest near Rs 80,000 crore and the Nifty put-call ratio moving below 1.5, reflects the rather unwarranted air of complacency in the markets.

The momentum indicators in the daily charts are implying further weakness in the short-term. The Sensex reversed from our first downward target last week. If last week’s low is breached, investors can look to 14500 for providing support. A close below this level will pull the Sensex towards the band between 13500 and 14000.

Though there has been a 6 per cent fall in the Sensex from its peak at 15868, the quandary regarding the degree of this correction remains unresolved. In other words, we do not know yet if we are correcting the rally from the March 2007 low or the June 2006 low. It would be best to take it one step at a time. To start with, let us wait for a close below 14500 before worrying about the correction getting any deeper. We will review the long-term counts for the Sensex and the Nifty and our outlook for 2007 if the index moves below this support.

For the week ahead, the Sensex would face resistance from 15268 and then 15497. A close beyond the second resistance is needed to signal that the correction has ended. If the index fails to rally above 15300 next week, it would mean that it is heading lower to 14634 and then 14262.

Nifty (4401.5)

Nifty made an intra week low at 4327 and buying emerged around the support zone at 4317 as indicated last week. The breaching of the medium term trend line is a negative signal for this index. It needs to close above 4462 for the short-term outlook to turn neutral. Resistance above 4462 would be at 4525.

If the index fails to move above 4462 next week, we can expect a fall to 4229 or 4107. Since this would be the third leg of the fall from 4648, this wave will be swift and vicious. Those holding longs should exit if the index moves below 4300. As far as the medium term is concerned, a move below 4300 will take the index to the support band between 3980 and 4050 in the medium term.

Global Cues

Despite the intense turmoil in the Dow Jones Industrial Average last week, it has managed to hold above the 13250 level. But chart patterns suggest a move lower to 12800 in near term. This view will be negated only if the index closes above 13700. It is the broader S&P 500 index that looks weak, having closed below its long-term 200 day moving average on Friday. Asian indices, with the exception of the Nikkei have turned in a relatively stronger performance. Nymex crude made a new record peak at $78.77 on Wednesday before giving up some ground. Though there can be short-term dip to $72.9 or $71.9, the positive intermediate term outlook stays firmly in place. — Lokeshwarri S.K.

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