The Hindu Business Line : Index Outlook

It was a placid week on the Indian stock markets. The Sensex plodded upwards and closed with a 3 per cent gain. The large cap stocks have slipped in to a soporific trading range over the past two weeks. However, the small cap stocks are keeping everyone entertained with sharp (at times absurd) moves.

Both the BSE small and mid cap indices recorded new life-time highs last week. Realty and technology indices were the out performers while autos, consumer durables and FMCG indices appear to have launched in to a short-term correction. FIIs have started nibbling again in the cash segment but they were net sellers in stock futures last week. This, coupled with the rise in the Nifty put call ratio, suggests that short positions are beginning to build again in the F&O segment.

Sensex moved sideways after the sharp jump on Monday. The chart pattern suggests that the index is forming a running correction wherein the correction makes the index move higher instead of sideways or lower. Such moves imply a strong bullish undercurrent. The near term outlook for the Sensex is positive and it can move towards 20900 shortly. Traders can buy in intra day dips with a stop at 19350.

But the medium term counts remain unresolved. The Sensex needs to move firmly beyond 20238 before it can start sprinting towards the next medium term targets at 20942 and then 22627. If the index falters below 20500, it can move between 18000 and 20000 for a few more sessions before the next upward break-out. The medium term outlook stays positive as long as the index remains above 18000.

Momentum indicators too corroborate the view that the short-term outlook is positive, but caution is warranted until the Sensex moves firmly beyond 20500. The upper targets for the Sensex in the week ahead are 20184 and then 20912. The supports for the week would be at 19374 and then 18880. Fresh purchases should be avoided if the index moves below the 18880.

Nifty (5974.3)

Nifty recorded a new life-time high of 6042 last week. The short-term outlook for the Nifty is positive. Traders can buy in dips with a stop at 5760. The short-term targets for the index are 6042 and then 6262. In other words, a firm break-out beyond 6050 will cause a sharp surge in the index. But a reversal from the current levels will drag it lower towards 5595 again.

The medium term targets for the Nifty remain at 6262 and then 6495. This view will be valid as long as the Nifty remains above 5394.

Global Cues

CBOE Volatility Index dipped from the recent peak at 31 to 20 levels last week indicating that investors are feeling confident that the Federal Reserve will cut interest rates once again thus giving a fillip to stocks. Dow Jones Industrial Average has moved towards the 13650 level indicated in our column last week. A move beyond this resistance will ensure a fresh long-term peak in the index. Many of the Asian indices such as Hang Seng, Korea’s Kospi and Thailand’s SET recorded a short-term term reversal (downward) on Friday. The week ahead is going to be critical for global equities as it will determine the medium term trend in most equity markets.

Nymex crude is consolidating above the support at $87, indicated last week. Recovery from here would take the commodity past the $100-mark before the end of 2007. Base metals such as copper and aluminium continue to display weakness. — Lokeshwarri S. K.

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