The Hindu Business Line : Index Outlook

Reliance Power’s mega public offer probably enveloped our markets in such an optimistic haze that the participants were unable to register the disturbing news-flow from overseas. How else can one account for the Sensex suddenly crashing by 9 per cent last week on the back of weak ‘global cues’, when these cues have been weak for the past many weeks.

FIIs joined the selling brigade last week thus denting the sentiment further. But the derivative segment has not witnessed any unwinding yet; the open interest is still above Rs 1,25,000 crore. The downward pressure from the unwinding of the long positions in stock futures remains the greatest threat to the markets at this juncture. Decline in Nifty put-call ratio implies that market players are betting that the fall would get stemmed shortly.

The BSE mid- and small-cap indices lost further ground last week indicating that the correction could be medium term in nature. Both the indices are in the third wave down from recent peaks and the small cap index is headed towards 11650, while the mid cap index could fall to 8650.

The charts of the Sensex that appeared indomitable at the beginning of last week, recorded an about-turn during the week, turning the short-term trend downwards. The index fell below our near-term trend deciding level of 19700 on Friday and came to a halt at the most recent trough at 18886. The near-term outlook will stay negative unless the index moves decisively above 19900.

As per e-wave counts, the artificial strength displayed by the Sensex over the last three weeks had led us to assume that an impulse wave was in motion since the 18182 trough that could culminate around 22000. However, last week’s move calls for a revision of the assumptions. It is now more likely that the sideways correction that began on October 30 2007 is still in force. The third part of this correction could have kicked off last week. The medium term targets for this correction are 19150, 18364 and then 17862.

In other words, the index has immediate medium term support at current levels. But the slide could take the index a little further towards the support band between 17800 and 18200. Our medium term view for the Sensex remains sideways — between 17500 and 22000. A fall below 17200 would be needed to signal that the long-term trend is reversing.

Short-term momentum indicators are oversold and hence there could be a bounce to 19348 or 19900 next week. Inability to move past the 50-day moving average at 19900 would indicate that the index is headed lower. A weak opening to the week will give the downward targets at 18979 and then 18332.

Nifty (5705.3)

Nifty hovered above our short-term support at 5937 for most part of the week before falling below it on Friday. The immediate support for the index is at 5680, but this down-move could drag Nifty lower to the next medium term support level around 5400. As we have been reiterating, the medium term band for the Nifty is between 5000 and 6700. We will not consider a long-term reversal unless the index falls below 5000.

For the near term, the index could bounce higher to 5881 or 5937. The 50-day moving average at 5937 will be an important resistance for the near term. Traders can go short if the index reverses lower from here. The short-term outlook will turn positive only when the Nifty moves above 6097.

Global Cues

It was a disastrous week for equities across the globe. Most global indices tumbled between 5 to 10 per cent, extending the down-move that began in the last quarter of 2007.

CBOE Volatility Index, a measure of investor’s trepidation, is nearing the highs recorded in November 2007. The Dow Jones Industrial Average has crashed below the intermediate support at 12500 and has already achieved our first lower target at 12100. The next key long-term support is however at 11500.

Nasdaq Composite Index too is extremely weak; positioned at the long-term support at 2343. A step lower – and the index will head for the June 2006 trough at 2014. What is more, the index could have resumed the long-term bear market that began in 2000. Asian indices are also beginning to bleed now. Hang Seng has retraced more than 30 per cent of the gains recorded since 2003. — Lokeshwarri S.K.

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