The Hindu Business Line : Index Outlook

Indian equities bore the antics of our Parliamentarians quite well in the first two trading sessions last week. But, once the UPA government won the vote of confidence, there were fireworks on the trading screens and the Sensex closed the trade on Wednesday with an 840 points gain. Short covering, subdued crude oil prices and benign global environment had a large part to play in this mid-week outburst.

Volumes picked up on the days when the Sensex flirted with the 15000 mark. However, the sentiment on the street stays edgy. This is reflected in the India VIX, our volatility index that has been steadily rising and is currently at 42.2. FIIs were net buyers in index futures all through last week indicating short covering of directional calls.

Sensex’ race to 15130 last week is a typical case of too much too soon. The breathless rally witnessed up to Thursday has already retraced 30 per cent of the down-move from 21206. Since the index is halting just under this level, the bulls and the bears stand an equal chance from here.

Our preferred view for the medium term is that the index oscillates between 12500 and 15800 over the ensuing months. This could be the much talked about base-building effort by the Sensex. If the lower boundary at 12500 is breached over the next month, it would mean that the bears are gaining strength and a decline below 11000 is then possible. Conversely a close beyond 15800 would shift the upper band to 17900.

The short term trend is, however, up and this fact is corroborated by the 10-day rate of change oscillator moving in to the bullish zone and the 14-day relative strength index at a reading of 52. The Sensex is also pausing at the floor of the gap that was formed on Wednesday. A reversal from here would mean that this up trend from the 12514 trough would have legs that take it higher.

The immediate supports for the Sensex are at 14130 and 13530. A reversal from the first support would take the index higher to 15130 and then 15826 in the near term. The positive outlook would be negated only on a decline below the second support and the subsequent target would be 12514.

Nifty (4311.8)

Nifty reversed after recording an intra week peak at 4539.4 last week. This level is very close to the key medium term resistance levels at 4560 and 4776. The reversal from either of these levels would imply a range-bound move between 3800 and 4800 for a few months as the index builds a base.

The near term trend in the index is however up and the short term support s are at 4256 and then 4084. Reversal above the first support would indicate that the up-move from 3790 low would have legs that take it higher towards 4760.

Conversely a decline below 4084 will open the way for another test of the 3800 support. Traders can hold their longs with a stop at 4080.

Global Cues

The reversal in global equities in the last two sessions has once again cast doubts on the sustainability of the up trend. Dow Jones Industrial Average reversed downward from the key resistance level at 11700 indicated in this column last week. Near term outlook for the index will, however, stay positive as long as it holds above 11,150. A bounce from this support would pull the index towards 12000. S&P 500 index too reversed lower from the key resistance at 1290. Close beyond this level is needed to make the near term view positive.

Commodity Research Bureau’s CRB Index was down 3 per cent last week following the melt-down in the commodities market last week. This index is down 14 per cent from the July peak, implying that the much needed cooling down in commodity prices is finally underway. Commodity-centered stock markets such as those in Russia and Brazil saw a strong sell-off. Gold too recorded a sharp decline last week. This commodity has immediate support at $900. It is likely to reverse from here and move towards $1000 again.

Lokeshwarri S. K.

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