The Hindu Business Line : Index Outlook

Even as the battle raged on to free hostages from multiple locations in Mumbai, Indian stock markets functioned with remarkable calm, sending the message that such inhuman acts cannot browbeat financial markets. Sensex ended 66 points higher on Friday. Massive rate cut by China and the Citigroup bailout kept the rest of the global markets cheerful.

In a show of solidarity, foreign institutional investors were net buyers in cash on Friday. They have, however, been net sellers to the tune of $644 million in November. The mid- and small-cap stocks are continuing to reel under selling pressure. BSE Midcap index closed at the lowest level since it was formed in 2005. This index is down 72 per cent from its life high. The small cap index has received a deeper cut of 77 per cent from its January peak.

Sensex moved in an extremely narrow band between 8600 and 9200 last week. The fact that it was the expiry week for the November contracts in the derivative segment could have been partly responsible for this sideways move. Investor apathy in the face of a continued barrage of negative news from the economy and from overseas too appears to have sent most investors to the sidelines.

The medium term trend in the Sensex is sideways since the October 27 trough. The third leg of this move could have commenced from the November 20 trough at 8316. Positive divergences in the daily oscillators support the view that the index can rally higher to 10323 or 11560 as this third leg of the correction unfolds.

But key medium term resistance is present between 11000 and 11500. The medium term view will turn positive only on a close above this zone. Another downward reversal from here will make the index move between 8000 and 11000 for a few more months.

The near -term view is turning mildly positive. Sensex can rally higher to 9340 or 10000 in the near term. Failure to surpass 10000 would be a sign that the down-move would resume to pull it lower towards 8300 once again. Next support is at 7697.

Nifty (2755.1)

Nifty moved in a range between 2650 and 2800 last week. This sideways movement has kept the short- and medium- term outlook unchanged. The third leg upward move from October 27 can take the Nifty higher to 3112 or even 3490. However a weekly close above 3400 is needed to make the medium-term view positive. Else, the sideways move between 2500 and 3500 will continue for a few more months.

The short-term view on the index is positive. A move higher to 2872 or 2960 is possible next week. But reversal from either of these levels will mean an imminent decline to 2500 or 2252 again.

Global Cues

Global markets pulled back last week on bargain hunting. CBOE volatility index eased to 55 as investors’ fears receded with the recovery in stock prices. Most indices recorded over 10 per cent gains. But it needs to be remembered that all the global markets are moving sideways in a lower range since October 27. None of them are in a medium term up trend yet.

Dow Jones Industrial Average pulled higher in the initial part of the week. The important resistance is between 9300 and 9600 in this index. Another reversal from here will result in the current range bound move (between 8000 and 9500) continuing for a few more weeks. S&P 500 too recovered strongly. A rally all the way to 980 or 1000 is possible in this index.

Commodity prices perked up too. CRB index closed the week with a 5 per cent gain. Agri-commodities such as cocoa, cotton and coffee were among the prominent gainers.

But the decline over the last three months has inflicted such a damage that the index needs to close above 410 to mitigate the bearish outlook. — Lokeshwarri S. K.

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