The Hindu Business Line : Index Outlook

Equity markets saw a defiant fight-back by the bulls, who perhaps wish to end 2008 on an optimistic note. The stimulus packages announced in India and by the President-elect in US provided fodder for the rally last week. Dismal industrial production numbers and other negative tidings were shrugged aside as Sensex closed 8 per cent higher.

The rally was more tempered in BSE mid and small-cap indices though a number of trading stocks soared merrily, causing a twinge of unease. The fact that the FIIs were net buyers throughout the week also aided the sentiment. Net cash inflow from this source has crossed $500 in December.

Buy signals are beginning to emerge in the weekly oscillators though they continue to be deep in the negative zone. The implication is that a medium-term trough is possible here but caution needs to be exercised till the index rallies a little further. We are likely to see the first positive close after three horrendous months in the monthly chart.

Sensex broke out of its short-term range on Wednesday and held steadily above it for the rest of the week. If we view the movement of the index since October lows, it is forming a flat pattern (a continuation pattern). The C wave of this pattern is currently in motion and has the targets of 10323 and 11564.

Once this pattern completes, the correction can either continue with an x wave and yet another three-wave corrective or the long-term down trend from the 21206 peak can resume. Wave counts of the down-move from the January peak suggests that volatility will persist over the medium-term and a decline below 8000 again can not be ruled out in this period. The key support that medium-term investors need to watch is 8500.

The short-term trend is currently up and Sensex can move on to 10031 or 10494. But investors could get edgy close to the psychological 10000-mark. The presence of the 50-day moving average at 10120 makes the band between 10000 and 10500 a formidable short-term resistance. Support levels will be at 9100, 8929 and 8467.

Nifty (2921.3)

Nifty moved close to our first short-term target at 2958 and closed with a 207-point gain last week. The short-term trend in the index is positive since the trough at 2502. This up-trend can extend to 3112 or 3490. The medium trend in the index is, however, sideways and a move between 2500 and 3500 is likely in this period. The medium-term view will turn positive only on a weekly close above 3500.

Nifty will face resistance from 2960 and 3040 in the week ahead. A downward reversal from the resistance zone between 2950 and 3050 will pull the index lower to 2670 or 2500 once more.

Global Cues

It was a choppy week for US equities though the rest of the global markets closed the week on a mildly positive note. The Dow Jones Industrial Average closed the week with a five points loss. This index is consolidating sideways between 8000 and 9500 since the last week of October. Conclusion regarding the next directional move cannot be drawn as long as the index is confined within this range.

Volatility eased and the CBOE volatility index closed at the lower end of its medium term range between 50 and 90, implying that investors were a little more sanguine. Commodity-oriented markets in countries such as Argentina, Mexico and Brazil recorded a strong rally last week backed by gains in some commodities. Bargain hunting was also witnessed in Asian markets such as those in Hong Kong, Korea, Taiwan and Thailand.

There was some respite for commodities too as the CRB index gained over 6 per cent. But the index is still below the long-term support at 356 implying that the outlook for this sector continues to be one of caution. — Lokeshwarri S. K.

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