The Hindu Business Line : Index Outlook

The Sensex, which was already reeling on the brink, collapsed below the 15000 threshold on receiving a facer from Bear Stearns last Monday. The blow sent the index to an intra week low at 14677.2 before it managed a feeble recovery to end the week with a 4 per cent loss.

The blow was more strongly felt on the mid and small-cap stocks. The BSE small-cap index lost 11 per cent while the mid-cap index closed 9 per cent lower. Volume continued to be abysmal as was the open interest in the derivative segment implying that traders are steering clear, and rightly so, of such a treacherous market. This low trading interest should ensure that the March derivative contracts expire peacefully next week.

The most important occurrence last week was the Sensex declining below the previous trough at 15332. This move proves that the intermediate term trend has reversed downward in the index. The weekly momentum oscillators continue to paint a glum picture. But positive divergences in the daily oscillators are providing some bright spots in the gloom.

The medium-term outlook stays negative. As indicated last week, the first target for the third wave from the 21206 peak occurs between 14600 and 15200. Last week’s low at 14677 could mark the end of a three-wave correction from January. But we need the index to show strength and move past 17200 before we can infer that at least one part of the long-term correction has ended.

Needless to add that the index needs to do a lot of work before it moves out of the current quagmire. The short-term resistances for the index next week would be at 15466 and then at 15916. Rallies that reverse from either of these levels would be construed as pull back rallies. A weekly close above 17200 is a pre-requisite to set the index on the road to recovery.

Investors should brace themselves to face another rocky week ahead. The Sensex could swing between 14000 and 16000 next week. If the 14667 trough is penetrated, the subsequent targets are 14226 and then 13731.

Nifty (4573.9)

Nifty reversed from an intra week low at 4468, just 20 points away from the previous low at 4448. The pattern in the daily chart over the last two weeks appears to be running correction; that has negative implication. This pattern will be confirmed if the index closes below 4448. The subsequent medium-term targets would be 4271 and then 4187.

The short-term rallies would face resistance from 4718 and then 4796. Reversal from either of these levels would be the cue for short-term traders to initiate fresh short positions. The index needs to move above 5250 to mitigate the negative medium term outlook.

Global Cues

The panic stricken state of the investors in the aftermath of the Bear Stearns bailout is amply reflected in the CBOE VIX that recorded a high of 35.6 last Monday. But the 75 basis points cut in the interest rate by the Federal Reserve and the resultant strength in US dollar assuaged sentiments and sent the indicator lower towards 25 again.

The Dow Jones Industrial Average spent an extremely volatile week but ended on a positive note, with a morning star formation in the weekly chart. But we will wait for a move above 12800 before pronouncing a medium-term reversal. The broader S&P 500 is, however, still in a short-term down trend. A close beyond 1350 will make the near term positive for this index. Asian and European markets were unimpressed by the Federal Reserve’s moves.

After the blood-letting in equities, it is now the turn of commodities to face the bear’s ire. The agri-commodities such as coffee, cocoa, cotton, oats, soybeans, sugar and wheat have given up all the gains recorded in the first two months of this year. Metals, too, plunged head long in to a correction last week. Gold is moving towards the support at $880. Aluminium and copper, too, took a hard knock. — Lokeshwarri S. K.

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