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Strong quarterly earnings and short-covering ahead of the expiry of the October derivative contracts played a significant role in the 9 per cent surge in the Sensex last week. The ease with which the Indian equity markets have discounted the P-note set back makes us hopeful that any negatives thrown by the two Central Bank Chairmen, Mr Ben Bernanke and Dr Y. V. Reddy next week, will also be absorbed with similar equanimity.

Market participants’ fears regarding large scale paring of positions by FIIs were allayed as they turned net buyers in cash last week. There are no signs of unwinding by FIIs in the derivative segment either. Sentiments were also buoyed by the smooth expiry of the October contracts and a healthy roll-over. The heavy open interest at the beginning of the November series is, however, a cause for concern. As we keep reiterating, holding speculative leveraged positions at these heights is highly risky.

The 10-week rate of change oscillator that reflects weekly momentum is currently at 36. The oscillator has not moved beyond 26 in the last five years and implies that the index is heavily overbought from a medium term perspective. The daily momentum indicators are, however, signalling a positive trend in the short-term.

The Sensex recovered from the support band between 17,100 and 17,200 as indicated last week. But the strength and speed of the recovery has surpassed our expectations. However, the index is still within the confines of its medium term range between 16,550 and 20000. Investors should watch out for sudden twists and turns as long as the index stays in this range.

As per e-wave counts, the index can take either of these routes over the next two weeks, (a) A tepid start to the week would mean that the fourth wave from 12316 low is continuing and that it would make the index move lower towards 17500 once more.

(b) But a race past 19400 would mean that the fourth leg from 12316 has ended at last week’s low of 17171 and that the fifth leg is now going to make the index rise higher to 19927 or 21079.

The wave structure of the move from 17,171 low too suggests that the Sensex can move higher towards 19343 and then 19978 in the short-term. In other words, the short-term outlook for the index is positive. But investors should continue to exercise caution. Long-term purchases ought to be deferred. Traders can buy with tight stop losses. The short-term outlook will stay positive as long as the Sensex stays above 18,500. Supports for the week would be available at 18500, 18231 and then 17976.

The move from the 5070 low that started last week appears to have ample steam left to drive the index higher to 5783 or even 5977. But investors ought to stay wary until the index moves firmly beyond the previous peak at 5736. The short term support for the Nifty lies at 5522 and then 5469. Traders can buy in dips as long the index remains above the second support.

The target for the fifth wave from 3573 falls at 5611, 5927 and then 6290. If the rally continues beyond 5800, then we can peg the next medium term target at 5927. The medium term outlook will turn negative only if the index falls below 5317.

CBOE Volatility Index that measures investors’ fear level, fell to 19 by Friday after recording a short-term high at 24 in the previous week. This implies that investor’s trepidation decreased last week as global equities stabilised themselves. The DJIA, which led the previous week’s sell-off, recovered after a minor wobble on Monday. But the short-term outlook for this index stays negative as long as it remains below 13900. Asian markets (with the exception of Japan) turned in a strong performance. Latin American markets were relatively subdued.

Nymex crude created a flutter on Friday by recording a new peak at $92.2. The commodity bounced off the support at $84 indicated last week. The near term targets remain at $94 and then $103. It would be interesting to see how equities react to crude at $100!

— Lokeshwarri S. K.

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