The Hindu Business Line : Index Outlook

It was an interesting tussle between the bulls and the bears on the Indian bourses last week. Bears had plenty of ammunition in the form of weak IIP numbers, soaring crude prices and sub-prime related write-offs with which they gained the upper hand. Sensex ended the week on a flat note after recording an intra week low at 15228. 9.

This one-day-up-one-day-down kind of market is keeping the traders on the sidelines; reflected in the low turnover in both cash and the derivative segment. Low open interest at around Rs 65,000 crores, too, indicates trading disinterest.

The broad-based nature of this correction is reflected in the BSE 500 index that has moved below its long-term trend line, portending a long-term reversal in the offing. Weekly and monthly momentum charts are also extremely weak in this index. Though the BSE Mid-cap Index is moving in tandem with the Sensex, the Small-cap Index is relatively weaker and could decline another 20 per cent from current levels.

Sensex tested the January 22 trough at 15332 twice last week. But buyers are emerging every time the index moves below 15500. This could be explained by the fact that 30 per cent correction from the January peak would mean that the Sensex could halt around 14844. Since the 2006 correction as well as the one in 2004 did not correct more than 32 per cent from the prior peaks, many in the market are optimistic about a bottom being formed around 15000.

As per E-wave counts too, the third leg from the 21206 peak has the first target between 14600 and 15200. The Sensex could halt at the first target and spend a few months in a sideways movement between 15000 and 19000.

That is the most innocuous scenario. But as explained last week, there are a few structural changes taking place in the charts that are hard to ignore. Sensex has now recorded two weekly closes below its long-term trend line. The 10-week rate of change oscillator is at a level not seen in the last 10 years. These factors call for a greater degree of caution at current levels.

We have a very short week ahead and most of it will be spent in reading Ben Bernanke’s mind. The immediate supports will be at 15059 and then 14858. Decline below the second support will pull the Sensex to 13731. The resistances would be at 16680 and then 17204. Wait for a move above the second resistance before initiating trading longs.

Nifty (4745.8)

Nifty closed the week on a flat note, resulting in a long-legged doji in the weekly candlestick chart; a pattern that reflects the ongoing tug-of-war between the bulls and the bears.

The index will face resistance from 4884 and then 5080 in the week ahead. Reversal from either level will be a signal for initiating fresh short positions. A close above 5080 is needed to mitigate the negative short-term outlook.

The immediate targets if the index starts sliding down are 4556 and then 4448. Buyers are likely to emerge around the 4400 level again. If this level is penetrated, the index can fall to 4271.

Global Cues

It was one step forward and two steps back for global equities last week. Dow Jones Industrial Average’s 416 points rally on Tuesday induced a spring in the step for all the equity markets but most of these gains were eroded towards the end of the week. The CBOE Volatility Index (VIX) spiked to 33 before closing at 31 indicating that investors turned panicky again on the news about Bear Stearns being on the verge of insolvency. Some Asian Indices such as Nikkei, PSE Composite Index and the Shanghai Composite Index have fallen well below their January lows. The Shanghai Composite is especially weak and seems headed towards the next long-term support at 3570.

The US Dollar Yen exchange rate’s fall below 100 Yen caused considerable consternation in the forex markets last week. This level has not been breached since 1995. A reversal should occur over the next week else the Yen could head towards the next support, which is at Y 79.7 (the trough made in 1995). — Lokeshwarri S. K.

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