The Hindu Business Line : Index Outlook

It was a nightmarish start to last week with the House of Representatives rejecting the bailout package and the credit crisis claiming a string of victims in Europe. Equities struggled to their feet mid-week, as the package was tweaked to placate the dissenting members and was finally passed.

However, resumption of the decline on Friday reflects the skepticism regarding the execution of this plan and its ability to stem the turmoil that is assuming gargantuan proportion.

It was a one-day-up-one-day-down kind of a week with the Sensex first plunging to a two-year low at 12153 only to recover sharply, leading optimists to hope that a bottom was finally in place.

But Friday’s sell-off dashed these hopes as the index closed at the lowest level this year.

Volumes were low, especially in the derivatives segment. Low open interest in futures and options indicates that traders too have grown wary at these levels.

Sensex has ended the week on a shaky note, thanks to the 529 points cut on Friday. The evening star in the daily candlestick chart denotes a temporary peak at 13203. The succession of lower peaks and troughs since August 12, the foray below 12500 last week and the weekly close at this threshold compound to make the medium-term view negative.

If we consider the targets of the wave from 15579-peak, they are 12354 and then 11200. A decline to the second target remains a possibility as long as the Sensex remains below 14295.

A close above 14295, where the 50-day moving average is also positioned, is needed to allay fears of a decline below 12000.

The short-term trend in the Sensex is also down. A decline to 12135 or 11925 is possible in the near-term. Short-term traders can expect psychological support around the 12000 mark. Conversely, close below this level will exacerbate the bearish sentiment. Key resistances for the week would be at 13200 and then 13500. Failure to rally beyond 13500 will imply weakness ahead.

The Sensex is currently poised at an important juncture. A significant trough is possible in the zone between 12000 and 12500. But breach of the floor of this band can lead to sharp erosion in stock prices. The movement of this index over the next two weeks would be key to determining the long-term road-map.

Nifty (3818.3)

Nifty recorded an intra-week low at 3715 on Tuesday. But there was a sharp rebound from here and the index closed the week within our medium-term range between 3800 and 4500.

Technical indicators, however, signal that this support could be breached in the short-term and the index could decline to 3715 or 3636 in the week ahead. Failure to move above 4070 in the early part of the week will fortify this assumption.

The medium-term view too is currently negative and the target of the move from 4649 gives us the downward targets at 3778 and then 3454. If the down move continues next week, the second target would be in reckoning.

Global Cues

Panic gripped investors across the globe as most indices recorded multi-year lows last week. CBOE VIX, the investor’s fear gauge, recorded a six-year peak at 48.4.

Commodities could do no better last week. CRB index, that tracks the movement of a basket of commodities, was down almost 12 per cent, belying our expectation of a rally in this asset class. Strength in the US dollar added to the pressure on commodity prices. The dollar index on ICE gained a stellar 4.5 per cent after rebounding from the support at 76.

Dow Jones Industrial Average moved conclusively below the support at 10700 last week. A decline to 10200 and finally to 9900 is now possible for this index. The S&P 500 likewise shattered the support at 1170 and is now headed towards the support band between 1060 and 1070.

Asian equities turned in a better performance than their European and Latin American counterparts.

— Lokeshwarri S. K.

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