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It was the menacing threesome – crude prices, inflation and interest rates, that spooked the markets once again last week and sent the Sensex reeling back toward 16500. The incredible re-listings provided the rare distraction in an otherwise gloomy week.

Volume continued to be lacklustre. However speculative interest, as indicated by the open interest moving above Rs 80,000 crore, is robust. Volatility could return as the May series of derivative contracts edge towards expiry. Predominance of short positions is a positive as it can aid in a market recovery next week.

The broad-based BSE 500 index has not been dented by the current correction. It is moving sideways between 6500 and 7000 over the last few weeks. Small-cap stocks too were unscathed in last week’s selling. Among sectoral indices, BSE FMCG index appears weak since it has reversed from the resistance zone around 2500 forming an ominous double top in the weekly chart.

Though the 4.5 per cent decline in the Sensex last week sounds daunting, the medium-term uptrend that commenced from 14677 continues to be in force. The index has been vacillating between 16500 to 17700 over the last five weeks; closing 4 per cent up one week and 4 per cent down the next. As pointed out in our previous column, the medium- term inclination of the index will become apparent only when the index breaks out of this range.

The short-term oscillators are in the sell mode. The formation of lower peaks since May 5 and the failure to get past the 200-day moving average is also a short-term negative factor. But the bulls need not lose heart as long as the index holds above 16350.

The strong support band between 16350 and 16500 can trigger a rebound that can take the index higher towards 17500 or even 18500. However, fresh purchases should be avoided below this band as it can usher in a decline to 15800.

The supports at 16540 and 16370 should be keenly watched next week. Subsequent support for the Sensex is at 16150. A bounce from the 50-day moving average at 16350 can take the Sensex to 17200 and then 17500. A close above 17500 will denote a short-term victory for the bulls.

Nifty adhered to our script last week; reversing from the resistance at 5200 to record an intra-week low at 4940. The index is now close to the lower boundary of its short-term trading range between 4900 and 5300. The index has also moved close to the 50-day moving average at 4910. In other words, Nifty can reverse after testing the 4900 levels and move higher towards 5200 again. The upper targets for short-term rallies are 5100 and then 5167. Medium-term target on a close beyond 5200 is 5400.

It is hard to envisage a sharp slide in the near-term. Fresh shorts are recommended only on a firm move below 4900. The next target would then be 4800.

CBOE volatility index that had been declining steadily since the March peak at 35.6 reversed last week to move close to the 20 level reflecting the return of trepidation among global investors. No points for guessing the reason behind this recent bout of volatility. Nymex crude prices recorded a peak at $135 on Thursday before retracting slightly. Though the present move in crude has long-term target between $125 and $132, an extension could see the commodity racing towards $167.

Though most global indices declined last week, the medium-term up trend in these indices has not been fractured yet. But the same cannot be said of Dow Jones Industrial Average that reversed lower from its 200 day moving average and is now headed towards the support at 12260. Penetration of this level will drag the index towards its March trough again. The Nasdaq Composite Index is relatively better placed, having retraced only 24 per cent of its prior up-move. — Lokeshwarri S. K.

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