The Hindu Business Line : Index Outlook

Indian markets displayed remarkable resilience last week and fought back bravely from lower levels despite the cacophony of voices on inflation, crude oil, interest rates, corporate earnings, FII inflows and so on. The Sensex closed the week with a mild 382 points loss.

The selling onslaught appears to have been spearheaded by the FIIs who have pulled out $1.6 billion from the Indian stock markets in June. Volume continued to be muted though the open interest in the derivative segment is creeping higher. Interestingly, both the BSE mid as well as small cap indices have not penetrated their March troughs yet indicating that the large caps have been more severely punished in this correction.

Sensex recorded a new trough at 14645 for 2008 last week. But buying interest is emerging every time the index declines below 15000. There are two paths that the index can now take over the medium-term,

1. It can recover from current levels and move higher to 16600 or even 17600. This would be the minor C of the corrective move from the March trough. Such a move will be in line with the consensus expectation that the index would move in the band between 14000 and 18000 over the next few months.

2. If the index fails to rise beyond 16000 over the next month, it would mean that the downward move from 17735-peak can intensify and drag the index below 14000.

The recovery towards the later part of the week was encouraging. But as we have been reiterating, the dice is loaded in favour of the bears in technical charts. The monthly chart of the Sensex indicates that the downward movement is beginning to gain momentum. The bulls face an uphill task in pulling the index out of this quagmire.

A tug of war is likely in the band between 14500 and 15700 over the ensuing week as the bulls try to protect the bastion at 14600. A move beyond either boundary will determine the favourites for the short-term. The resistances for the week would be at 15500 or 15734. Supports would be at 14645, 14520 and then 14011.

Nifty (4517.1)

Traders would be satisfied with the relatively innocuous weekly close in the Nifty after the scary plunge to 4369 witnessed on Tuesday. If the index manages to hold above the 4400 level, it can attempt a rally to 4940 or even 5300 as the third leg of the correction from the March low unfold.

But a failure to move beyond 4750 would be an indication that the index would decline below 4300. Swing traders can watch out for opportunity to initiate fresh short positions on a reversal from the band between 4700 and 4750.

Short-term resistances for the index would be at 4608 and 4682. The near-term outlook will turn positive only on a close beyond the second resistance. The supports for the week would be available at 4330 and then 4186.

Global Cues

Global equity markets followed the US stock markets lower last week. Even the European and Asian indices, that were holding up well till the end of the previous week succumbed to selling pressure. China, Taiwan, Thailand and the Philippines were among the worst affected markets in Asia.

Though the Dow Jones Industrial Average declined below the key support at 12250 on Wednesday, it managed to close the week above this support, holding out the hope that the decline could get stemmed with a higher bottom formation. The key short-term resistance is at 12500. The S&P 500 holding above 1325 is also a positive for the US markets.

The key to the commodity price moves lies in the movement of the US dollar. And the US dollar index on FINEX has closed just beyond the May peak, which is a positive signal.

But these are baby-steps for the US currency that has been bludgeoned out of shape since 2002. A close above 75 in this index would set it on the road to a more sustainable medium term up-trend.

— Lokeshwarri S. K.

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