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Stock markets wilted last week as market participants decided to follow the maxim, ‘sell in May’, at least partly, by taking some profit off the table. With the simmering crude oil prices stoking inflation fears in most countries, equities are likely to put up a muted show in the week ahead.

Volume was very low as some investors retreated to the sidelines and others to hill-stations. The front-line stocks bore the brunt of the selling pressure last week. The decline in BSE mid and small-cap indices were much lower, around 3 per cent. FIIs remained on the back foot for most part of May. Open interest in the derivatives segment has, however, crept up to almost Rs 70,000 crore. Predominance of short positions imply that portfolio hedges could account for a major chunk.

We had indicated last week that the Sensex had reached key medium-term trend deciding level. The bearish engulfing pattern in the weekly candlestick chart and the fact that the 10-week rate of change oscillator has reversed just under the zero line imply that the medium-term trend could have reversed lower again. But this view will be confirmed only on a strong close below 16500.

In other words, the bulls have the opportunity to wrest control once again if the index sustains above 16500. A bounce above 16500 would imply that the up-move that began at 14677 can have legs that can take in beyond 18000 eventually. The subsequent support is at 15800. Investors need to start worrying only if 15800 is penetrated.

In e-wave parlance, it is certain that a flat formation was completed at 17687. But we are yet to determine if the B wave ends here or this is just one part of the B wave, that can be a complex double or triple three. The extent of this correction will determine the medium- term movement of the Sensex. Halt above 16500 will keep open the possibility of a spurt towards 19000 while a decline below 15800 will imply a range between 14500 and 18000 for a few more months.

Sensex could move sideways with a negative bias next week. As explained above, the support band between 16400 and 16500 can act as a buttress in the near term. Subsequent targets for the index are 16198 and then 15820. Resistances would be at 17080 and 17300. A close beyond 17735 is needed to signal the resumption of the up trend.

Nifty declined last week, in line with our expectation. The index moved below the much-cited and much-watched 200-day moving average to record an intra week low at 4969. The key medium-term support for Nifty is at 4920. A reversal from here would imply another leg higher to 5400 or 5650. So stop loss level for long positions can be at 4950.

The subsequent supports would be at 4880 and then 4800.

Investors need not fret as long as the index stays above the second support (4800). A move below will imply that the index could spend a few more months in the trading band between 4400 and 5200.

Resistance levels for the week would be at 5100 and then 5200. Fresh trading shorts can be initiated if the index fails to surpass the first resistance.

Most equity markets took a step backward last week, halting their medium-term up trends. The CBOE volatility index inched higher towards 20, denoting the reduction in complacency levels in the equity markets. The Dow Jones Industrial Average failed to build on the gains recorded in the previous week and closed with a 2 per cent loss.

The short-term trend in this index will, however, turn negative only on a decline below 12600. Asian indices too moved lower. The out-performers among the global equity markets were Brazil and Russia.

— Lokeshwarri S.K.

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