The Hindu Business Line : Index Outlook

As analysts across the globe debate over whether the beginning is ending or the end is beginning, there is definitely a consensus on the fact that this is not the end of the credit and financial market muddle. The unending tales of debacles from these sectors is beginning to erode the last vestiges of investor confidence. Sensex ended the week down 940 points.

But this gloom and doom sentiment can be termed as a positive since it is in such conditions that markets bottom. Volumes were muted last week, especially in the cash segment. Breadth deteriorated considerably on Friday. September series expired with low rollovers and the mood on the street is amply reflected in the 3 per cent decline in Sensex on the first day of the new settlement.

It was a very disappointing show by the Sensex last week; reversing lower from Monday’s peak at 14221. The gap formed the previous Friday has been closed, underlining the negative short-term trend. The index is still below the long-term trend line that was breached in June 2008. Oscillators in the monthly chart have also worsened further making a re-test of the 12500 lows imminent.

The moot question is — will this level hold this time? The answer is dependant on the decision taken regarding the $700-billion bail-out in US this weekend – an imponderable. We have stayed with the count that the Sensex could move sideways for a few more months as it charts the second leg (B wave) of the long-term down-trend from the 21206-peak. However, an emphatic move below 12500 would have ominous implications.

Such a move would mean that the B wave was a very short one (time-wise) and ended at the August peak at 15579. If the C wave of a larger degree has begun from 15579, it has the first target at 10207. The Fibonacci retracement of the entire bull-phase from 2001, gives us the immediate support at 11920 (50 per cent retracement). However, it would be best not to jump to any conclusion until the index closes below 12500.

Resistances in the week ahead would be at 13800 and 14400. Fresh trading longs are recommended only above the second resistance. Supports for the week would be at 12750, 12514 and 12354. Traders should stay watchful for another rebound from the 12500 level. We reiterate that investors should use declines to buy high-quality stocks for their long-term portfolio.

Nifty (3985.2)

Nifty closed below the psychological 4000-mark last week. If the index has resumed the long-term down trend from the January peak at 6357, the minimum downward target would be 3070. As per Fibonacci retracement supports, the next support on the long-term charts is at 3587.

These levels will only come into play once the index moves firmly below 3800. Another rebound from here can keep our medium-term range between 3800 and 4500 going for few more months.

Resistance levels for the week ahead would be at 4180 and then 4320. Failure to surpass the first resistance would provide opportunity for initiating fresh shorts. Downward targets are at 3907 and then 3778. Subsequent medium-term target would be 3587.

Global Cues

Equity markets across the globe remained edgy last week though they held resolutely above the lows recorded in the previous week. CBOE VIX ranged between 30 and 37 reflecting that the level of trepidation among the investors remains high. Dow Jones Industrial Average declined to an intra-week trough at 10753 before staging a mild recovery. An emphatic close beyond 11500 is required to start a sustainable recovery. Else, a decline to 10200 or 9900 would be on the cards. The near-term outlook is bleak for the S&P 500 as well.

Some Asian markets such as those in China, the Philippines and Korea recorded strong gains last week. The CRB index that captures the movement of commodity prices rose 2 per cent. The fact that this index has bounced from 462, which is the minimum retracement requirement of the bull market from 2001 implies that the bullish fervour could return to commodity prices again. Nymex crude is consolidating in the band between $105 and $110. A spurt to the zone between $120 and $120 is possible in the near-term.

— Lokeshwarri S. K.

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