The Hindu Business Line : Index Outlook

A relatively benign environment in global equity markets and a conciliatory stance adopted by the political parties helped the Sensex to snap back above the 15000 mark, away from the chasm that was beginning to open at its feet. The Sensex heavy-weights such as Tata Steel, State Bank of India and Reliance Industries were once more at the forefront aiding the pull-back.

The advance last week was accompanied by good breadth and volumes. The smooth roll-over of the August series is another cause for relief, though we are beginning the September series on a fairly heavy note. The Nifty put call ratio has also risen from over-sold levels denoting the upswing in market sentiment.

There is no doubt that the risk of a crash below 14000 in near term has been averted. The Sensex has regained 75 per cent of the losses made since the 15863 peak. The 10-week ROC oscillator has reversed from the zero line and the 14-week RSI has reversed from the 50 level. Both these readings imply that medium term outlook for the Sensex is very positive. The close above the 50-day moving average line is also a sign of strength.

So, where is the Sensex headed now? After the see-saw movement witnessed since late July, we are back where we started, close to the upper boundary of our yearly range. There are multiple e-wave counts at this stage. The simplest one is that the last leg of the move from 8800 is on since 12316; the third minor of this move could have commenced from the recent low of 13780. The more complex count is that the Sensex is forming terminal corrective triangle since December 2006.

As per both the counts, there would be strong resistance as the Sensex nears the 16000 level. A reversal below the 16000 mark will usher in renewed choppiness and a fall towards 14000 will be on. Conversely, a move past 16k will pave the way for another 1000 points surge (which is unlikely given the weak trend in other global indices).

In the week ahead, the Sensex can move higher to 15763 or 15972. Supports for the week will be available at 14955, 14752 and then 14592. The short-term outlook will stay positive as long as the Sensex stays above 14590.

To sum up, the Sensex can test 16000-level soon. But a confluence of targets in the band between 15900 and 16000 makes it an important resistance zone for the short as well as intermediate term. Charts of other global indices indicate that equities are not out of the woods yet and some more ground needs to be covered before we can leave volatility behind. Fresh purchases should be made with a long-term perspective only. Those with less holding power can stay on the sidelines for a couple of weeks.

Nifty (4464)

Nifty broke out of our farthest target to rally to an intra week high of 4471. The medium term outlook has turned positive in the Nifty and the index can now rally to 4553 or 4666. The short-term outlook will stay positive as long as the index trades above 4370. Traders can buy in dips until this support holds. The subsequent supports for the index would be at 4293 and then 4226.

Volatility can re-emerge as the Nifty nears its previous peak at 4648. The zone between 4650 and 4750 is an important resistance band for this year. A break-out beyond will take the index towards 5000. On the other hand, a reversal from this band will drag the index towards 4000 again. Position traders should stay alert and watchful as the index nears this resistance zone.

Global Cues

Global markets were kept edgy last week by the news flow relating to the sub-prime crisis. Though there was no sell-off, most markets gyrated just under their medium-term resistances.

The Dow Jones Industrial Average has retraced 61.8 per cent of its recent correction. A firm close above 13500 will set the stage for yet another shy at the 14000 mark. Many of the European and Asian markets are also poised at similar trend-deciding levels.

Nikkei is one of the worst hit in this correction while Hang Seng and Shanghai Composite Index are joyfully trilling ahead to new highs.

Volatility spiked up on Tuesday though it moved lower towards weekend.

Recovery in crude gained momentum last week, taking it to an intra week high of $74.4. The medium term resistance is at $75. But the commodity seems ready to move towards the $78 mark again.

Base metals too have started a tentative up-move. — Lokeshwarri S. K.

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