The Hindu Business Line : Index Outlook

The Sensex withstood the political turmoil caused by the Left parties’ withdrawal of support to the Central Government remarkably well in the early part of the week. But it buckled under the barrage of negative reports from the economy and global front on Friday to end the week on a wobbly note.

The week was marked by very thin volumes reflecting the lack of conviction among the bulls. Most market participants appear to be waiting for a more sustained recovery before venturing to buy. The low Nifty put call ratio implies that bears too are edgy and have closed their short positions at lower levels. FIIs continued to be net sellers in cash.

The short-term up trend from the 12822 trough appears to have ended at the intra-week high of 14047. The completion of a three-wave move from this low and the evening star formation in the daily candlestick chart corroborate this view. Weakness in the weekly momentum indicators and reversal in the daily oscillators denote that volatility could return to the markets next week.

But as explained earlier, the immediate target for the C wave from 17735 falls at 12700 and the next long-term support on the chart occurs at the March 2007 trough at 12316. These two levels are likely to cushion any short-term decline in the index.

The Sensex could once again try to stabilise itself from 12800 or 12300 and spend a couple of weeks more in the range between 12300 and 14500. Such a move will retain the negative medium-term outlook. A close above 14677 is needed to reverse this view.

Conversely, a close below 12300 would imply that the index is heading for the next medium-term target at 11200.

For the week ahead, Sensex has the immediate target at 13290. A reversal above this level can pull the index higher to 14108 or 14576. A close below 13290 will pave the way for a decline to 12822 or 12354.

Nifty (4049)

Nifty reversed from an intra-week high at 4215 last week. The immediate support for the index is at 3988. A reversal from here can pull the index higher to 4241 or 4381 again. However, the medium-term outlook will turn positive only on a close above 4461.

Fresh shorts are advised only on a firm decline below 3988. Subsequent targets for the index are 3848 and then 3708.

We expect the index to move in a range between 3700 and 4200 over a couple of weeks before the next course becomes apparent.

Global Cues

The Chicago Board Options Exchange’s Volatility Index (CBOE VIX) that is widely tracked to gauge the mood among the investor fraternity, spiked to 29 on Friday, implying that the panic is beginning to build up again as the sub-prime crisis threatened the two mortgage guaranteeing firms, Freddie Mac and Fannie Mae.

The DJIA moved sideways with a negative bias, declining below the 11000 mark briefly on Friday. The movement last week appears to be a running correction in this index, implying that a decline to 10700 is imminent in the near term. However, a matter of greater concern is the S&P 500’s close below the March trough at 1270. Weakness in the early part of next week would set the next target for this index at 1175.

The sell-off was intense in European stocks with the European benchmark indices, FTSE, CAC and DAX moving conclusively below their March lows. Asian indices were relatively stable.

Commodities too underwent a bout of volatility last week. The CRB index declined more than 3 per cent implying a reversal on the weekly chart.

Agri-commodities such as cocoa, coffee, corn, base metals and natural gas declined sharply from recent peaks.

— Lokeshwarri S. K.

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