The Hindu Business Line : Index Outlook

Just when it appeared as if the Sensex would slip past the 10,500 mark, it was yanked back by the misdoings of Mr Ramalinga Raju. Bears exploited the situation to the hilt, bludgeoning stocks across sectors, sometimes for the most absurd reasons. Sensex’ return for 2009 dipped in to the negative towards the close of the week.

Profit booking ahead of quarterly earnings announcement could partly account for the crash in some of the mid and small-cap stocks that had recorded stellar gains over the past month. Volumes were significantly higher especially on Wednesday when the Satyam swindle came to light. Healthy open interest in the derivatives segment implies that traders are once more becoming active.

Sensex was unable to get past the medium-term resistance in the band between 10,500 and 11,000 last week. It recorded an intra-week peak at 10,469 on Wednesday morning before declining to 9,250. Weekly momentum indicators have retreated in to the negative zone after a brief sojourn into the positive territory. The implication is that medium-term trend that was beginning to turn positive is once more under a cloud. The 10-day rate of change oscillator has also declined in to the negative zone and the 14-day relative strength indicator is at a reading of 44 implying that the short-term trend too has turned negative.

The bulls however need not throw in the towel as long as the Sensex holds above 9,000. An upward reversal from here will result in the index moving higher towards 10,500 or 11,000 again. The near term view will turn murky only on a definitive close below 9,000.

Medium-term trend in the index continues to be sideways in the band between 8,000 and 11,000. Sensex is declining from the upper boundary of this range. As per E-wave counts, a five-wave move has been completed between November 20, 2008 and January 7, 2009. This is the third part of a 3-3-5 flat formation. What can now ensue is:

a)An X wave followed by another three or five wave pattern. This would keep the Sensex vacillating in the band between 8,000 and 11,000 for a few more weeks.

b)The alternate count is that the long-term downtrend has resumed from the recent peak at 10,469. In this case, the index could head to 8,246, 7,424 or a little lower.

For the week ahead, an upward reversal from current levels can take the index higher to 9,700 or 10,000. Failure to surpass the first resistance would imply that the down trend would resume to pull the index lower to 9,120 or 8,467. Key near-term support for the index is at 9,120. Short-term investors can continue to buy in declines as long as this level holds.

Nifty (2873)

Nifty reversed from an intra-week high at 3,147 to close 173 points lower. If we view the weekly chart of the Nifty, it has been a one-week-up-one-week-down kind of move over the last four weeks.

In other words, the index is confined to a narrow band between 2800 and 3100.

The short-term view will be clearly defined only on a break-out beyond this range.

The 50-day moving average at 2,870 has not been penetrated yet.

The index can move higher from here to 2,936 or 3,015. Failure to clear the first resistance would mean that the down trend from the 3141 peak would resume to pull the index lower to 2750 or 2570.

Short-term traders can hold their long positions as long as Nifty sustains above 2750.

A strong close below this level will signal an impending decline to 2502 or 2252.

Global Cues

Equity markets in Europe eased gently lower in a mild correction last week. US markets were however volatile as a slew of negative economic news dragged the stock prices lower.

CBOE volatility index that had recorded an intra-week low of 37 perked up to 44 towards the end of the week indicating the return of nervousness among investors.

Dow Jones Industrial Average reversed lower from the 9000 mark.

It is possible that the third leg of the up-move from the 7,450 trough was truncated at 9,000.

A recovery above 8500 will however mean that there can be another spurt higher to 9,600 levels.

The medium-term outlook will turn overtly negative only on a weekly close below 8,060.

Latin American markets in Brazil and Chile were the out-performers last week with over 3 per cent gains on improved prospects of commodities.

Some Asian indices such as Jakarta Composite, KLSE Composite, Philippines PSE Composite Index, Seoul Composite Index, Thailand’s SET and Shanghai Composite Index too managed a positive weekly close.

Commodities continued to consolidate around key long-term supports.

CRB index inched 1 per cent higher for the week.

Nymex crude recorded a peak at $50.5 per bbl and is retreating fast.

Key resistances for this index over the next few months would be at $50 and then $55.

The floor is likely to be at $25. — Lokeshwarri S.K.

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