The Hindu Business Line : Index Outlook

Sentiment on Indian bourses seesawed between hope and despair last week. The strong mid-week surge caused by crude oil’s decline below $110 was thwarted by the global wave of selling in equities that seeped into the Indian stock markets, pulling the Sensex lower to a flat weekly close.

This vicious sell-off has given a sharp setback to the nascent recovery that commenced from the July trough in the global equity markets. Indian investors can however derive comfort from the fact that the Sensex is among the select few indices that remain on their feet. Volumes were subdued in Indian markets. FIIs remained on the back-foot for most part though they pumped in close to Rs 1300 crore on Wednesday.

Sensex could not build on the momentum generated in Wednesday’s session and slid lower to a tame close. The small-bodied candlestick with a long upper shadow in the weekly candlestick chart of the Sensex denotes that the bulls ceded control to the bears towards the end of last week. However, if we consider the movement over the last three weeks, Sensex is moving in a range between 14,000 and 15,000. In other words, the short-term trend is currently sideways and investors should brace themselves for violent swings in either direction in the near-term.

To recapitulate our intermediate term view for the Sensex, the index has completed a three-wave move down from the January peak at 21,206 to the July trough at 12,514. The rally from this trough to the peak at 15579 has retraced 35 per cent of the prior down-move. If this is rally is a corrective up-move, it can take the index to anywhere between 15100 and 18000. The extent of the current decline will determine the shape this corrective move can take:

a) If the short-term decline from the 15579 peak halts above 14,000 it will leave open the room for a rally to 15,900 or 17,074.

b) A decline below 13700 will signal an impending move to 12,500 again. The index can then be expected to stay in the range between 12,500 and 15,500 for a few more months.

c) The outlook will turn overtly negative only on a decline below 12500. But long-term investors should go on a buying spree if that happens.

For the week ahead, Sensex can decline to 14,131 or 14,000. A reversal is possible from the 14,000-support. If this level is breached, subsequent target would be at 13529. A strong start due to a positive outcome to the NSG meet can cause a rally to 15,120 or 15,542 again. Investors can utilise declines to add to their long-term holdings, while traders need to wait for the market to start trending again before jumping into the ring.

Nifty (4352)

Nifty reversed lower from an intra-week peak at 4522. Immediate supports for the index are the 50-day moving average at 4267 and the recent trough at 4200. A reversal from these levels can pull the index towards 4500 again. Downward target below 4200 for the short-term would be 4075.

If the week starts on a buoyant note, the Nifty will move higher to 4526 or 4650.

We retain a positive medium-term view for the index as long as it holds above 4100. A reversal above this level can commence yet another leg of the correction that can take the index higher to 4732.

Global Cues

It is a sorry picture that global indices have been painting this week. The Dow Jones Industrial Average broke down decisively on Thursday, proclaiming that the bears are still in control. However, the index is hanging on to the key support at 11,200. The S&P 500 is likewise clinging to 1240. Close below these levels will make a retest of the July lows imminent. A matter of greater concern is the meltdown in the Nasdaq Composite Index that tumbled over 5 per cent lower. The FTSE too lost 7 per cent, negating the optimistic view that was emerging for this index. Other European indices have also resumed the down trend that is in place since last October.

Some of the Asian indices such as the Shanghai Composite, Hang Seng, Jakarta Composite, Taiwan, Thailand and Straits Times Index have moved on to new lows for this year. Stocks in Philippines, India and Sri Lanka are the outperformers in the bunch. Volatility, indicated by the CBOE VIX, zoomed from 20 to 24. Commodities were not spared either and the CRB index, declined more than 4 per cent. — Lokeshwarri S. K.

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