The Hindu Business Line : Index Outlook

Forced smiles gave way to genuine cheer as stock prices zipped upwards to light up the Diwali sky last Tuesday. A consensus seems to be building up across the globe that the selling had been over-done and some respite is in order. Sensex ricocheted upward from Monday’s trough at 7697 to close with a triumphant 1087 points weekly gain, that too in just three full sessions!

There is however no doubt that equity markets will take some time to recover from the battering received in October 2008. The losses this October rank among the top ten monthly losses in S&P 500 and the highest ever in points in the Dow Jones Industrial Average. Sensex too has lost 3072 points in October and it was down 5163 points when it reached the nadir on October 27.

It is after a hiatus of five dismal weeks that some semblance of reversal is visible on the technical charts. The hammer pattern on the daily candlestick chart and the bullish piercing pattern on the weekly chart imply that a short-term trough has been formed at 7697. The Sensex has closed above our key long-term support at 9700. Mild signs of strength are also visible in the daily oscillator charts. But the magnitude of the fall over the past month has rendered such spurts immaterial in the weekly as well as the daily time-frame.

In e-wave term, it is too early to judge if the C wave that commenced from 15579 has ended. As explained earlier the first and second targets for this wave are 10209 and 6887. The wave could terminate between these two levels also. The action over the next two weeks needs to be observed before drawing any conclusion.

We stay circumspect from a medium-term perspective. The one-week-up-one-week-down kind of move observed in global indices over October means that any up-move needs to sustain for more than one week before it can be taken seriously. Oscillators in the weekly chart are still muted. Investors should watch out for the 10700 level. If this level is surpassed, there can be a surge towards the long-term resistance at 12500.

The resistances for the week ahead would be at 10177 and then 10275. The minor wave counts of the down-move from 15579 indicate the current short-term up-trend will face strong hurdle in the zone between 10100 and 10300. A downward reversal from this zone will mean that the index will head lower to 8000 and below. This up-trend will turn overtly positive on a close above 10750. Short-term supports would be at 9040 and 8543.

Nifty (2885.6)

Nifty recorded an intra-week trough at 2252 before re-bounding. But the piercing pattern in the weekly candlestick chart of Nifty is weaker than that in Sensex. As explained earlier, the target of the third wave from 6357 peak is 3070 and 2093. A significant trough is possible anywhere between these two targets. November 2005 trough at 2314 is the support around which last Monday’s decline halted. The medium-term resistance to watch is at 3200. This level needs to be surpassed if the Nifty has to make a dash towards 3830.

For the week ahead, there would be strong resistance in the zone around 3000. If this level is crossed, the next resistance is at 3235. Reversal below 3000 will imply that the down-move would resume to pull the index towards 2200 again. Supports would be at 2670 and 2510.

Global Cues

It was a splendid recovery in equities across the globe and the investor trepidation level too came down; as was indicated by the CBOE VIX’s decline to 59.8 from the peak of 89 recorded in the previous week. However, if we consider the movement over the last three weeks, most indices are moving sideways in a range resulting in wide week-to-week swings. The DJIA too is moving sideways and has closed near the upper boundary of this range. A close beyond 10400 is needed to signal that a sustainable recovery is underway in this index.

CRB index, that maps the commodity price movement, is recovering from the key support at 356. Though the recovery is not strong enough, the fact that the index is attempting to stabilize is a positive. Comex gold declined below the support at $730 to an intra week trough at $680. The next long-term support for the precious metal is at $650 and the third leg of the decline from March peak has the target at $630. A trough in the area between $630 and $650 is possible on a close below $700. — Lokeshwarri S.K.

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