The Hindu Business Line : Index Outlook

Despite the brouhaha over the Sensex closing below 10000, there are a number of positive takeaways from last week’s proceedings. The regulators appear to have finally identified the cause for the present turmoil and seem to be taking steps in the right direction, credit markets eased and more importantly, no financial institution lined up for emergency resuscitation last week. Stock prices did gyrate tirelessly, keeping everyone on the edge of the seat, but the troughs formed in the previous week were not breached significantly by any of the major global indices.

Though the weekly close below 10000 has rattled everyone, it needs to be borne in mind that the Sensex too is just 200 points below previous week’s trough. Last week’s movement of the Sensex is in fact comforting as the index appears to be attempting to stabilise itself at lower levels. Volumes were low reflecting the extremely bearish sentiment. Activity was subdued in the derivatives segment as well.

The steep decline witnessed over the last month has taken the daily, weekly as well as monthly oscillators into oversold territory. Monthly and weekly relative strength index is currently at a level last recorded in September 2001, following the World Trade Centre bombing. But these indicators have not yet reversed higher or signalled a buy.

It is apparent that the third leg of the downtrend from January peak in Sensex is unfolding since the 15580 peak. If we consider the minor counts of this leg of the down move from 15579, the much-feared third of third (third minor of the third wave) seems to have been in motion since the September 22 peak at 14221. This part of a down-move wreaks extensive damage and is extremely ferocious. But it is also very swift and ends quickly.

In other words, the index could be close to a medium-term trough that can be formed at 9700 or just below, in the band between 9300 and 9400. A period of sideways movement between 9500 and 12000 can then follow as the move from 15580 completes itself before starting a sustained medium-term up-move. Investors need to worry only if the index declines below 9300 over the next two weeks as that would suggest that the third wave is extending.

Volatility can persist in the week ahead. A strong opening on Monday would take the index higher to 11204 or 11557. Close above 11557 will make the short-term outlook positive paving the way for a rally to 12066. Conversely, a weak start will drag the Sensex to 9679 or 9409. A sustainable medium-term trough is possible at either of these levels.

Nifty (3074.3)

Nifty rose to an intra-week peak at 3648 before declining below the psychological 3200-mark. The index is close to the long-term support at 2940 indicated last week. If we consider the targets of the third leg down from the 6357 peak, the first target is 3070. In other words, a medium-term trough is possible in the band between 2950 and 3000 following which the index can move sideways between 2950 and 3500 for a few weeks before launching a medium-term up-move. A decline below 2950 would, however, mean that the third leg is extending. The June 2006 trough at 2595 would then be in reckoning.

For the short-term, an up-move on Monday can take the index higher to 3419 or 3522. Reversal from either of these levels would result in a sideways move between 3000 and 3500 for a few weeks. Target above 3522 is at 3735. Supports for the week would be at 2965 and then 2543.

Global Cues

It was a very volatile week for most global indices as they moved higher in the first half of the week only to reverse in the second half to end on a rather shaky note. Meanwhile, the CBOE volatility index recorded a new high on Thursday and recorded its strongest weekly close ever at 70.3 implying that investors continue to be extremely nervous. The Dow Jones was volatile in a 1000-point band. A close above 9400 will mitigate the negative near-term outlook in this index. Else a decline to 7400 or 7200 is possible before an intermediate term trough is formed.

Commodities extended their decline; the CRB index fell 3.5 per cent for the week. Crude traded on Nymex declined to $68.6 per 1000 barrels last week before recovering to close above $70. The supports on the long-term charts are at $66 and then $62. Decline below these levels will imply the end of the bull market that is in sway since 1998 in this commodity. — Lokeshwarri S. K.

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