The Hindu Business Line : Index Outlook

The blind hurtle in stock prices ended last week, as all such rallies normally culminate; with a resounding crash. Retail investors’ confidence was shattered to smithereens as the bottom suddenly fell off the stock prices. However, Federal Reserve came to the rescue of the equity markets with a generous rate cut that has warded off the advancing bear; for the time being.

The fall last week was aggravated by FII selling. They have sold more than $3 billion in the last two weeks. Some unwinding was seen in the derivative segment last week. The open interest is down by 30 per cent. But volatility is expected until the expiry next Thursday as many could still be holding on to losses in stock futures.

Sensex dipped briefly below the long-term 200-day moving average on Tuesday to record an intra-week low of 15332. The recovery from this level has triggered a short-term up-trend in the index. But the medium term outlook for the index is currently neutral. The index could rally up to 19923 in the near term. A rally above this level is needed to indicate that Sensex can move on to a new high. A reversal below 19000 would mean that the recent low of 15330 would be tested again.

Momentum indicators corroborate this view. There are tentative buy signals in the daily oscillators but the 10-week ROC has slipped in to the negative zone and 14-week RSI has moved lower to 52. The low volume recorded on Friday, the day of the 1139 point gain, belies the strength in this up-move. Investors need to stay cautious till the Sensex closes firmly above 20000.

It is not hard to forecast that the week ahead is going to be rocky. The Sensex could move higher to 18833 or 19923 next week. But the area around 19000 is a key resistance for the index. Reversal from here will mean a fall lower towards 17230, 16550 or 15332.

Nifty (5383.3)

Nifty too is currently in a short-term up trend from its intra-week low at 4448. The current up trend can make the index move on to 5557 or 5905. 5630 will be the key resistance level to watch out for next week. Reversal below this level will make the Nifty fall lower towards its recent low at 4448. Rally beyond 5900 is needed to signal that the index is on its way to a new high. The support levels for the week are at 5037, 4918 and then 4448.

Global Cues

The sharp cuts received in the early part of last week made most equity indices test their long-term trend lines. While most reversed from this support, some indices such as the Nasdaq Composite and the FTSE are below this trend line thus signalling the end of a structural bull market. Some Asian markets such as those in Indonesia, Malaysia and Singapore were more resilient. Shanghai Composite is, however, floundering just below its 200- day moving average. The movement of the global indices over the next month needs to be studied before we can gauge if this is the beginning of a prolonged bear phase in equity markets.

CBOE VIX re-visited the August 2007 peak at 37 as the global equities went into a free fall last Tuesday. But the Federal Reserve’s largesse caused this index to ease lower to close the week at 29 implying that nerves were somewhat smoothed by the end of the week.

Long-term outlook

When we penned the Sensex’ outlook for the year 2008, little did we imagine that it would need a review as early as January. We had expected a strong January and February for the Sensex based on Fibonacci time cycle targets from the June 2006 trough. This study indicated that a major peak was due towards the end of February 2008. But in long-term moves, the peak can be advanced by a month.

Another assumption made while expecting a sedate first quarter was that the fourth and fifth wave from the 8800 trough were yet to unfold. Last week’s move indicates that the move from 8800 could have been completed at 21206.

So are we correcting the entire rally from the 2003 lows? Even if we are, the 30 per cent correction in the Nifty and 28 per cent correction in the Sensex have already met the minimum retracement requirement for a long-term correction. As per Elliott Wave theory, corrections can be either time-wise or in prices. Since 2003, our markets have been correcting only in prices not in time. Perhaps, it will be the same this time too. But it is too soon to come to any conclusion right now. The movement over the next month needs to be seen before the long-term trend can be determined. It is quite possible that this correction has legs that make it a protracted one that extends for a few months. — Lokeshwarri S. K.

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