The Hindu Business Line : Index Outlook

There is something about May. The approach of the sweltering month with soaring mercury levels appears to bring a feeling of unease among the stock market fraternity, probably incited by thoughts of the mayhem in May 2004 and 2006. The mid-week spike in India VIX (volatility index) and the negative breadth, despite the 650 points gain in the Sensex, reflects the nervousness in the market.

The movement of Sensex this year is more akin to the gyrations in the same period in 2004 than in 2006. The index recorded strong gains prior to the May 2006 crash. On the other hand, in 2004, there was a steep correction between January and March, followed by a pull-back in April, succeeded by the crash in May 2004. To end on a cheery note, the Sensex recorded a new life-time high by December in both 2004 and 2006.

Moving back to the present, net FII inflow in cash has been almost negligible in the month of April implying that they were divided over the sustainability of the current rally. Nifty put call ratio nearing 1.4, too, denotes the predominance of shorts in the positions that were rolled over.

There is some respite in the long-term charts due to the positive month of April. The momentum indicators in the monthly chart are beginning to reverse. Interestingly, despite the sharp correction, these indicators are still in the bullish zone. The Sensex, however, continues to trade below the long-term trend line.

Sensex moved close to the medium-term resistance at 17200 last Friday. The next 300 points are a key resistance from the medium-term perspective, since a reversal from these levels can pull the index down towards 15000 again. Conversely, a move beyond 17400 will pave the way for a rally towards 18000 or 18750. The resurgence in speculative activity, negative breadth and sagging momentum, however, calls for a cautious stance in the near-term.

Since a three wave move from the 14667 trough is nearing an end, the index can move sideways between 16227 and 17400 next week. The near-term view will stay positive as long as the lower boundary holds. The subsequent support would be 15645. If the Sensex moves past 17400, the next target would be 17869.

Nifty (5111.7)

Nifty surmounted the psychologically important 5000 mark last week. As mentioned last week, the target for the third leg of the move from 4448 trough is 5132 and then 5442. The immediate resistance for the index is at 5150, where the 200-day moving average is positioned and then at 5200, which is a key Fibonacci resistance level. The near-term outlook will stay positive as long as the Nifty holds above 4870. The level that investors ought to watch is 4720. Fresh long positions are advised only if the index moves past 5200. A reversal below this level can drag the index towards 4500 once more and result in a protracted sideways move between 4500 and 5200 for a few months.

Global Cues

Equity markets either consolidated at higher levels or moved gently lower last week. The movement in global indices suggests that there could be one more spurt before a medium-term reversal. The Dow Jones Industrial Average too moved sideways between 12600 and 12900. An up-move to the key intermediate resistance between 13070 and 13200 appears imminent now. S&P 500 is yet to cross above the resistance at 1400. The star mover last week was the Shanghai Composite Index with a 15 per cent gain.

— Lokeshwarri S. K.

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