The Hindu Business Line : Index Outlook

Indian markets gave a timely wake-up call to investors last week; dispelling the dreams of a ‘de-coupled’ Indian stock market soaring blissfully sky-wards even as the rest of the global markets came under the bears’ onslaught. Hopefully, this jolt has cooled some of the buying fervour witnessed over the last few weeks.

The statistics from the derivative segment, however, suggests that the sentiment continues to be cheery despite the fall last week. Open interest on NSE is over Rs 1 lakh crore with futures and options on stocks making up nearly 70 per cent of these positions. Nifty put call ratio has slipped below one; another manifestation of the belief that corrections would always be short-lived.

Though Sensex fell below 18300 on Thursday, it closed the session at 18526. This level is important from a near-term perspective since the 50-day moving average line is positioned here. The medium term outlook for the Sensex stays positive. The weakness in the weekly momentum indicators is a trifle worrisome. But we will wait for one more week before drawing any inference from those indicators.

Our short-term view last week was based on the assumption that the fifth wave from the March trough had commenced in the Sensex. But the fall last week implies that the fourth wave that began from 20238 is still in progress. The immediate target for this move is 18300. But a fall below this level can take the index to the next support band between 17500 and 17770.

In other words, the benchmark is currently in a consolidation phase that can make it move between 17,500 and 20,000 for a few more sessions. Fall below 17,500 would drag the Sensex to 17,000. But we expect the Sensex to halt above 17,500 and resume its journey towards 21,000 from there.

However, investors should not expect runaway returns from the stock markets in the months that follow since the period between August and October was the most profitable part of the rally from the June 2006 trough (the third of the third).

The next few months could see the index swinging between 17000 and 22000 as the final stages of this long-term move plays itself out. The positive outlook for the long-term would be threatened only if the index falls below 17000.

The index could witness wild swings in the zone between 17700 and 19500 next week. Trading longs should be contemplated only if the index moves beyond 19500. Failure to move beyond 19000 would mean that the index will be dragged lower to 18300 or 17794. Rallies should be utilised to reduce derivative positions. It would be a good idea to book some profits in stocks that zoomed upward in the last two months. They are beginning to return to ground zero.

Nifty (5608.6)

Nifty could not reach the magical 6000 mark last week, reversing from an intra week peak at 5982. The move below 5664 has made the short-term outlook negative in the index.

It is now certain that the index is in a correction of a larger degree. The correction of the upward move from 4002 has the minimum target at 5409 (from where the index reversed on Thursday) and the next target lies at 5244. In other words, traders can hold their long positions as long as the index stays above 5200. A fall below this level would, however, give the next medium term target of 5007. Our medium term view is that the Nifty would swing between 5000 and 6500 over the next couple of months before a long-term correction sets in.

In the weeks ahead, the index can rally higher to 5757. Fresh longs should be initiated only when the Nifty moves above 5757. However, a failure to rally above 5650 would mean that the index would fall lower to 5274 or 5050.

Global Cues

Global equity markets continued to be on tenterhooks though there was no major sell-off last week. Chicago Board Options Exchange’s (CBOE) volatility index, VIX, is hovering between 23 and 29 reflecting the edginess in global investor sentiment. Though it is below the high of 37.5 recorded this August, the trend suggests that it could climb above 30 soon. Friday’s recovery could not help the Dow Jones Industrial Average to a positive weekly close; it closed 1.5 per cent lower.

The index needs to clamber above 13250 to make the short-term outlook positive again. European indices such as FTSE and CAC began a fight-back last week. But another 5 to 6 per cent gain is required to steer these indices out of trouble.

Both the Shanghai Composite Index and the Hang Seng are quite weak with the weekly momentum indicators implying the onset of a medium term down trend. Some of the other Asian indices such as the Kospi and the Straits Times Index too witnessed heavy selling pressure last week. Nikkei is just 4 per cent away from its June 2006 trough. A fall below this low will confirm a long-term down trend in the index.

Nymex crude is still poised tantalisingly close to the $100 mark. It seems just a matter of time before that level is surpassed. Copper fell sharply last week announcing the onset of an intermediate down trend.

All eyes were, however, riveted on the strengthening Japanese Yen that has gained 5.6 per cent against the US dollar in just three weeks. Penetration of the support at 109 Yen has caused considerable consternation in the financial markets. Another weekly close below this support would mean that the USD-Yen exchange rate would head towards the 2005 trough at ¥102. — Lokeshwarri S. K.

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