The Hindu Business Line : Index Outlook

The month of May did live up to its reputation. It brought the Sensex’ upward march to a halt and pushed it 900 points lower. But most market participants would be relieved at escaping this lightly given the concerns on the inflation and economic growth fronts.

The pinch was however felt in the $1.2-billion drain by the FIIs in stocks this month. Volumes picked up towards the expiry day in the derivative segment. High Nifty put-call ratio denotes that more short positions were rolled over as compared to longs. While this reflects the air of caution prevalent in the market, it is a positive since short covering can lend impetus to the next upward surge.

The long-term charts have clearly received a set back by the negative close in May. The nascent recovery in April has been negated and the oscillators are once more threatening to move into the bearish zone. To recapitulate the long-term view, one leg of the long-term down-trend ended at 14677 in March. It is not easy to label the move since then since it is not yet complete. The optimistic count would be that the up-move from 14,677 would evolve in to a complex sideways move that keeps the index between 15800 and 18000 for the next quarter or so.

The dire count would be that the pull-back has ended at 17736 and the third leg of the long-term down trend is now in motion. We need not worry about this possibility till the Sensex closes below 15,800.

The short-term outlook for the index is negative since it has declined below the key support at 16500. The trend-line penetration and lack of momentum in the daily oscillators are other factors that point towards the decline continuing in the near-term. However, the going would get rocky only on a sharp fall below 15800. Reversal from this region would still hold out the hope of a rally above 17,000.

Technical indicators point towards a choppy trade in the week ahead. Investors can watch for the supports at 15,880 and then at 15,400. The decline will intensify if the second support is breached and the next target for the index would be 14,628. Resistances would be at 16718 and 17000. The near-term outlook will turn positive once the index closes above the second resistance.

Nifty (4870.1)

Nifty could not engineer a reversal from 4900 last week and declined towards 4800 instead. The index is now testing its long-term trend line on the monthly charts. The key medium-term support for Nifty is at 4800. Penetration of this level will signal that the trough at 4467 would be tested in the medium-term. The index needs to close beyond 5100 to mitigate the negative medium-term outlook.

In the near-term, the index could decline to 4766 or 4648. However, fresh shorts are recommended only on a sharp decline below 4800. The resistance levels for the week would be at 4950 and then 5030.

Global Cues

After being yanked backward in the previous week, global equities spent last week trying to stabilise themselves. The Dow Jones Industrial Average ended the week with a gain of over 150 points. Though last week’s recovery lacks conviction, the medium-term outlook will turn negative only on a breach of 12,250. Most Asian markets appeared to be biding their time after the sharp decline in the previous week while some such as Taiwan, Thailand and Korea witnessed a sell-off on Friday.

Nymex crude price movement since February 2008 appears to be a diagonal triangle that is common in fifth waves. Such a move could denote the end of the entire up-move from the January 2007 trough. The fall-out would be a move to $100 again over the ensuing months. It is however, too early to determine if this is also the end of a five -wave formation from 1999. Either way, corrections might not go beyond the $85 to $100 band.

— Lokeshwarri S. K.

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