The Hindu Business Line : Index Outlook

Robert Rhea’s work published in Barron’s in 1932 describes one of the phases of a classic bear market as, “this phase represents the abandonment of the hopes upon which stocks were purchased at inflated prices.” This sentence accurately captures the mood in the Indian markets last week as the Sensex recorded yet another low for the year.

Serious doubts are now beginning to rise in the minds of most market participants with regard to the unassailability of the current bull market. Volumes were lacklustre, even on days when the index closed with gains. FIIs continued as net sellers. Surfeit of short positions in the derivative segment can aid in the market recovery next week as the June contracts near expiry.

The oscillators in the monthly chart deteriorated further last week. The 10-month rate of change oscillator (ROC) has slipped in to the negative zone and the 14-month relative strength index (RSI) is at a reading of 50. These indicators have not tested these levels since 2003! However, positive divergences in the weekly and daily ROC imply that a recovery is possible in the short-term.

We had marked two possible medium-term moves for the Sensex in this column last week. Since the index failed to move past 16000, it is obvious that the third part of the down-move from the 21206-peak started at 17735 on May 5. The minimum target for this wave was 14676 (already achieved). Further decline would bring the next target at 13700 in to play. The fact that the August 2007 trough is at 13780, adds significance to this level.

If we step back and view the entire bull market since September 2001, the important Fibonacci retracement support for this move occurs at 14096. If the current bear phase is going to be a shallow but prolonged (more than two years) then we can get away with a sideways move between 13500 and 20000 over this period.

In other words, the Sensex is nearing key long-term support levels and the movement of the index over the next couple of weeks will determine how the Indian markets will move over the long-term. We will do a more detailed review of the long-term counts if the Sensex closes below 13700 for the week.

It is highly likely that the Sensex recovers after an initial dip next week. The range envisaged for index over the next couple of weeks is between 14000 and 15500. The immediate downward targets for the index are 14089 and then 13880. Resistances would be at 15789 and 16400.

Nifty (4347.5)

Nifty failed to move beyond 4750 and declined to an intra-week low at 4333 instead. It is now obvious that the C wave from the 6357-peak in unfolding now. The next target of this wave is 4130. If we look at the key Fibonacci retracement target for the current bull, phase, it occurs at 4287 and the August 2007 trough lies at 4002.

Nifty can halt this leg of the down-move at either of these levels. Traders holding short positions should book profits around these levels.

The immediate downward targets for the Nifty are 4320 and then 4168. The resistances for the week ahead would be at 4700 and then 4880.

Global Cues

It was an extremely disappointing show by the Dow Jones Industrial Average as it trudged lower towards its January trough at 11600. The zone between 11500 and 11600 is very significant from a long-term perspective for this index. The moot question is whether this level will hold. A penetration of this level would take the index lower to 10700. A positive take-away from the charts of the US indices is that the picture in the S & P 500 is not that dire as the index is only slightly below the key support at 1320. The Nasdaq Composite Index too is weathering the recent leg of the decline quite well.

Many of the European indices are nearing their March lows. The Asian indices have been relatively resilient last week, moving in a band that is half-way down from the recent rally recorded in April. Philippines, China and Thailand continue to under-perform the other Asian indices.

CRB Index on NYFE gained 6 per cent last week after a sideways consolidation spanning nine weeks, implying that commodities could be getting ready to zoom upwards again after the minor halt. Base metals such as copper and aluminium and some of the agri-commodities recorded sharp upward movement last week. Crude is ominously hovering in a narrow band between $130 and $138. A spurt to $147 to $150 appears imminent. —Lokeshwarri S. K.