The Hindu Business Line : Index Outlook

Markets were nervous in the first half of the week as the Government announced ad-hoc measures to deal with the woes of the oil marketing companies. Just as the bargain hunters had convinced themselves that the worst was over, inflation numbers induced a fresh set back on Friday. With crude prices shooting through the roof on Friday night, investors need to brace themselves for a turbulent time next week.

External investors continued to be net sellers last week. Though the open interest in the derivative segment is near Rs 70,000 crore, predominance of short positions implies that a situation akin to January, when excessive leveraged positions among retail investors caused a sell-off, is not likely this time.

The cracks in the monthly charts are now beginning to widen. The point of concern is that the Nifty has moved strongly below its long-term uptrend line.

This index had held above this line despite the corrections in January and March. The Sensex has, of course, been below this line over the last four months. 10-week rate of change oscillator dipping in to the negative zone and the 14-week relative strength index giving a sell signal at 43 too imply that the medium-term down trend that commenced at 17735 in Sensex can continue further.

The moot question is - how much further? We had explained the quandary in the long-term counts in this column last week. The decline below 15800 makes a re-test of the 14677-trough fairly certain. As we have explained at length in our columns in March this year, there is a confluence of long-term supports for the Sensex in the band between 13700 and 14800. To be more specific, the supports are at 14844, 14064 and then 13861.

It is very likely that any long-term correction halts at the above levels. The ferocity of the down-move in the first quarter too implies that the next wave down can halt at or above 13700. But a full-fledged C wave can wreak havoc and cause a decline below 13700.

Sensex can move lower to 15135 and then 14619 in the near-term. The area around 14600 can act as a near-term support for the index. Resistances would be at 16160 and then 16490. Rally beyond the second resistance is needed to mitigate the negative short-term view.

Nifty (4627.8)

Nifty closed conclusively below the support at 4800 thus making the medium-term outlook negative. The index has a cluster of long-term supports between 4000 and 4400 that can cushion any decline from current levels. The supports are at 4389, 4273 and then 4002.

In the near-term however, the March trough at 4467 would lend support to the index.

A reversal from this zone can trigger another climb to 4900-5000 zone.

The immediate targets for the Nifty are 4485 and then 4421. Close below 4467 would mean that the index is moving lower to 4325. Resistances would be available at 4830 and then 4900.

Global Cues

Commodities spurted across the board on Friday, spurred by weakness in the US dollar. But the most spectacular move was in crude that recorded a peak at $139.1 on Friday causing pandemonium in equities. The mayhem witnessed in the equity markets in the US on Friday has made the CBOE volatility index spike to 23 after declining to a low of 15.8 just two weeks back.

Dow Jones Industrial Average is close to the medium-term support at 12250.

Another bad day would imply that the index is heading towards the March trough at 1456. Nasdaq is weathering the present correction relatively well. Other Asian markets, too, had a steady week, though their reaction to crude at $138 will be apparent only on Monday.

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