The Hindu Business Line : Index Outlook

It was the turn of the bear to thunder through the Indian stock markets last week sending stock prices and the indices tumbling to one-year lows. The tiny mid-week recovery was scuttled by crude prices that spiked above $140 on Thursday. The weekly close below 14,000 has left everyone wondering where this would finally end.

The rising level of pessimism in the market is a positive since it is one of the hallmarks of a market bottom. This pessimism was reflected in the sales of index options by FIIs last week implying that they expect our markets to decline further. BSE mid and small-cap indices that had been holding up well in the sell-off in June joined the large-cap sliding brigade last week leaving no place to hide for investors.

The Sensex’ plunge to the intra-week low at 13730 has helped to achieve the first target of the C wave from 21206. We have dwelt at length in our previous columns regarding the importance of the support band between 13700 and 14000. It is still possible that the index stabilises at current levels and moves higher towards 17000 over the medium- term.

But it is obvious to all observers that the Indian benchmark is very precariously placed. What if the 13700 bastion is shattered? The next long-term support on the chart is present at 12316 - that is the March 2007 trough. Fifty per cent retracement of the bull market from 2001, gives us the level of 11900. In other words, the next long-term support band for the index is around 12000.

Again, we have been reiterating that the third waves (up or down) are all-inclusive and cause extensive damage in a very short period. Penetration of the 13700 support will mean that the downward momentum will accelerate.

The Sensex can decline to 13554 or 13178 next week. Resistances will be at 14500 and then 15000. Failure to rally past the first resistance will imply that the down-move will intensify. Investors having sleepless nights worrying over their portfolio need to have faith in the companies they have invested in. The fundamentally sound stocks will recover though it might take them a year or two to do so. It is time to think long-term and nibble at blue-chips stocks at opportune levels.

Nifty (4136.6)

Nifty declined to an intra-week low of 4093 before staging a recovery. But subsequent moves make it obvious that the index is poised to decline further in the near-term. The index is currently pausing close to the first target of the C wave from the 6357 peak. The next target for the index is at 4002 that is the August 2007 trough.

If the index declines below 4000, the next long-term support would be at the March 2007 trough at 3573 that coincides with the 50 per cent retracement of the current bull-market.

For the short-term, the downward targets for the Nifty are 4106, 4002 and then 3961. The down-move will intensify only on a decline below 3950. Resistances would be at 4320 and then 4450. Fresh long positions are advised only on a close above the second resistance.

Global Cues

All eyes were riveted on the Dow Jones Industrial Average as it plunged to a new 2008 low and closed with a 4 per cent weekly loss. The target of the C wave down from the October 2007-peak is 11393 and then 10318. The index has already achieved the first target and some attempt at stabilisation is possible at these levels.

Despite the violent moves in the equities, the CBOE VIX (volatility index) was at 24, well off the peak at 37 recorded in the first quarter of 2008. This can probably be explained by the fact that the other US indices are not that negatively poised. The broader S & P 500 and the Nasdaq Composite have yet to test their March lows. European indices continue to under-perform their Asian and Latin American peers. Philippines and Chinese stocks trudged lower.

Crude prices on Nymex took a tentative step beyond the short-term band between $130 and $138 on Friday, sending a ripple of fear in equity markets. Immediate upward targets are $148 and then $159. Gold needs to move past $940 to indicate that a medium-term recovery is under way.

– Lokeshwarri S. K.

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