The Hindu Business Line : Index Outlook

It was a week of capitulation for our equity markets. The bulls threw down their arms as wave after wave of grim news-flow from overseas pounded the bourses. Sentiment collapsed and stock prices fell in to a seemingly bottomless pit making the Sensex lose 9 per cent in just four sessions. There is little that investors can do other than ride this phase until the market finds its feet.

The broader market suffered greater losses since the safe havens were few and far between. BSE Midcap Index lost 11 per cent while the Smallcap Index lost 12 per cent. The low volumes accompanying this fall is worrisome since it indicates that investors are holding on, watching their losses widening every day. Both mutual funds and FIIs were net sellers last week.

The monthly chart of the Sensex had remained unscathed thus far, in the current correction. But the first cracks are beginning to appear in the long-term charts. The 14- month relative strength index has moved to 56. This indicator has not fallen below 65 since September 2004. The 10-month rate of change oscillator has fallen below the August 2007 low.

The matter of greater concern is that the Sensex has closed the week below the long-term trend line drawn from May 2003. The Nifty is hovering just above this line. However, since these are long-term trend reversal signs, we will wait for a monthly close below this line to confirm a reversal.

Sensex closed below the much-watched 200-DMA last week and is close to the January 22 low of 15332. It is now confirmed that third leg of the down-move from 21206 (C Wave) is in motion. The minimum target for this wave is 15265 and the next target is 13021. If we consider the retracement of the long-term move from 2003, there is an interim support at 14229. The August 2007 trough at 13870 is another level that can lend support if the 15000 bastion breaks.

In the near term, short-term reversals would face resistance at 16650 and then 17200. Failure to move above the first resistance will accentuate the bearish outlook for the short-term. A firm close above 17350 is required mitigate this view. Investors can cherry pick stocks with a two- to- five-year perspective. Traders can sell the rallies, especially if the Sensex fails to move above 16650 next week.

Nifty (4771.6)

As the Nifty crashed below the support at 5000 and then 4800, it became apparent that the C wave from the 6357 was in motion. The targets for this wave are 4371 and then 3645.

If we consider the long-term charts, the next Fibonacci retracement support for the Nifty is at 4279. The August 2007 trough at 4002 would also come in to reckoning once the recent low at 4448 is breached. Any short-term rallies would face resistance at 4942 and then 5109. Failure to move beyond 4942 would be the cue for traders to initiate fresh short positions. The index needs to move above 5300 before fresh long positions are initiated.

Global Cues

Most of the global equity markets turned weak towards the end of last week. The European and US indices are close to the January lows now. The key level to watch out for in Dow Jones Industrial Average is 11500. If this level is broken, the next support would be another 800 points away.

Some Asian markets such as Thailand, Taiwan, Sri Lanka and Indonesia are beginning a fledgling recovery. The other equity group that is gung-ho is the Latam group including Mexico, Brazil and Peru Lima.

After Nymex crude crossing the $100 milestone, it is gold that is set to hog the limelight next week as it readies to move past the $1,000. Some agri-commodities such as coffee, oats and sugar saw some profit taking. — Lokeshwarri S. K.

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