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Soaring inflation and the Government’s ad-hoc measures to control it kept the market on tenterhooks last week. With the probability of another CRR or interest rate hike hanging like the proverbial sword of Damocles over market’s head, it is hard to envisage a dash past 17000 just yet.

FIIs were once again on the back-foot last week recording heavy sales in cash segment. Turnover continued to plumb new depths. Among the sectoral indices, BSE Pharma and FMCG index appear strong while capital goods index has moved below the trough formed in March implying further declines from current levels.

The positive short-term set up that was beginning to emerge in the last week of March was battered by the sell-off witnessed on Monday and Friday. The gap that was mentioned in our previous column has closed and the morning star in weekly candlestick chart is cast under a cloud by the bearish harami pattern formed this week. Another matter of concern is that the 50-day simple moving average has crossed below the 200-day moving average reiterating that the structural bull market is currently under threat.

Just as we did not take the bullish indicators too seriously in our column last week, the negative signals mentioned above are also not significant since the index is currently vacillating between 14500 and 16500. Such dramatic shift in sentiment and trend-following indicators is common while indices move sideways.

However, the area around 14000 is an important long-term support since the 30 per cent decline from the January peak should make the Sensex halt at 14844. The 38.2 per cent (Fibonacci number) retracement of the bull market that started from the 9/11 trough occurs at 14094. In short, the place where the index is halting is just right.

But it needs to be borne in mind that a ‘V’ shaped recovery akin to the one in the second half of 2006 might not be possible this time. Sensex could test everyone’s patience by moving between 14000 and 17000 for a few months before the next impulse wave unfolds. A close above 17200 is needed to redeem the negative medium term.

Despite the 1000 points loss in the Sensex, the near-term trend has not turned overtly negative. The index is pausing at the near-term support at 15300. An upward reversal from these levels can take the index to 16406 and then 17028. The short-term outlook will turn negative only on a decline below 15300. The subsequent targets are 14667 and then 14198.

Nifty reversed on Monday and declined to our outermost short-term support at 4640 during the week. But the near-term outlook will turn negative only if the index falls below 4620. A reversal from these levels can take the Nifty higher to 4943 or 5135.

But the medium-term outlook for the index stays negative. Failure to move past 4825 in the early part of the week can drag the index lower to 4424 or even 4087. The medium-term view will turn positive only on a move above 5200.

The bad news has not stopped flowing, but the stock markets seem to have reached a stage where stock prices have discounted all the potential ill tidings. Most equity markets in the US, Europe, Asia and Latin America extended their short-term up move last week. The exceptions were Indonesia, China, Taiwan and India.

The strong rally in the US equities on Tuesday has made the Dow Jones Industrial Average move close to the short-term ceiling at 12750 once more. It needs to be seen if the index moves beyond, to the next resistance at 12920, that is 50 per cent retracement of the current correction. If it fails to do so, the index can move down once more towards 11800. S&P 500 too is inching close to the resistance at $1400. The week ahead would be important in determining the medium-term outlook for the US equities.

Comex gold is halting above the key support at $880. A reversal from here can take the metal to a new peak over the next three months. Conversely, a fall below this level can pull gold down to $840 or $800.

— Lokeshwarri S. K.

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