The Hindu Business Line : Index Outlook

Volatility was conspicuous by its absence in the equity markets last week. Trading was almost dull without the wild gyrations. Investors were treading water, buying selectively in beaten down sectors. The sea of red migrated from the trading screens to the bird’s nest stadium in Beijing on Friday, holding viewers spell-bound.

Volumes dropped in the second half of the week as Sensex scaled 15000. Trading activity is however beginning to perk up. Open interest has crept above Rs 70,000 crore. Net cash flows from FIIs were positive last week thus aiding liquidity.

If we consider the monthly chart of Sensex, there have been five consecutive closes below the long-term trend line thus conclusively proving that the structural bull-market from 2003 has terminated. The sharp decline in the monthly rate of change oscillator denotes that this is the fastest decline in the Sensex in absolute terms over the last two decades.

But one leg of this down-move has been completed at the July 16 trough at 12514 and a recovery is currently underway. It is difficult to gauge how the entire bear phase will shape at this juncture; whether it will be a flat, zigzag, triangle or a double or triple combination. The other two major corrections in the Sensex, in 1992 and then in 2000, resulted in shaving about 55 per cent from the peak. The fact that the index is already down 41 per cent from its peak and has retraced 47 per cent of the bull phase from 2003, means that the down side could be limited from these levels.

The medium-term trend is currently positive. But the Sensex is in the key resistance band between 15100 and 15800. A conclusive breakout from this zone is required to take the index to the next medium-term target at 17100. Else another bout of volatility could be in the offing. The medium-term view will turn negative only on a decline below 13600.

The Sensex appears to be biding time in a narrow range over the last three sessions. The impetus provided by falling crude prices can take the index higher towards 15422 and then 15876. Short term supports would be at 14400 and then 13720. Traders can buy in declines as long as the first support holds. Investors can continue cherry-pick for their long-term portfolios.

Nifty (4529.5)

Nifty moved in line with our expectation, achieving an intra week peak at 4616 and then moving sideways for the rest of the week. A break-out from the current range will take the index to the key resistance at 4776. As we have been reiterating, a downward reversal from 4776 will result in a decline towards 4150 or 4000 once again as the index moves in a broad-based range over the medium-term.

The short-term trend is however up and traders can watch out for supports at 4440 and then 4300 in case weakness returns. Buying in declines is advised as long as the Nifty holds above 4300.

Global Cues

It was the turn of the commodity-heavy stock markets to take it on the chin last week, following the continued melt-down in commodity prices. Equity markets in countries such as Argentina, Brazil, Peru and Russia recorded sharp declines. Other equity markets were in a consolidation phase. The Dow Jones Industrial Average moved sideways and is poised just above the key near-term resistance at 11700. If this level holds, the next target for the index would be 12100. Nasdaq is showing surprising strength and could move towards 2500 over the medium-term.

CRB index, that tracks commodity prices, fell 7 per cent last week and is down 18 per cent from its peak recorded on July 2. The sharp spike in US dollar is behind the tumble in commodity prices last week. US dollar index on FINEX moved above the 200-day moving average and the medium-term resistance at 74.5 to close at 76 for the week. This is one of the most promising rallies witnessed in this currency since November 2005!

— Lokeshwarri S. K.

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