The Hindu Business Line : Index Outlook

It was a more sedate trading week in Indian stock markets. The minor decline in the first two sessions was arrested at 10700 and the Sensex ended the week well above the 11000 mark. Action is however likely to be explosive next week with just three trading sessions that include the expiry day of the April derivative contracts, slew of corporate earnings and the deadline for deciding Chrysler’s fate.

Trading interest is however high in the market though the benchmark is trudging sideways. Open interest in derivative segment has mounted to Rs 95,000 crore, close to the highs recorded towards the end of 2007. Number of option contracts in the open interest is reaching all-time highs. These are signals that the market is overheated. Some degree of comfort can be derived from the high put-call ratio that indicates that many of the traders are betting on a market decline. Short-covering of these positions can take stock prices higher from these levels.

Momentum is slowing down in the daily Sensex chart though weekly oscillators are still bullish. Ten-week rate of change oscillator is firmly entrenched in the positive zone, while the 14-week relative strength index is on the verge of entering the bullish zone implying that the medium-term trend is still positive.

From a long-term perspective, the trend is down since the 21206-peak. However, a strong counter-trend rally is in progress from the low of 8047. The first resistance zone for this move lies between 11600 and 11800. If this level is crossed, next resistance band is between 12800 and 13000. July 2008 trough at 12500 is another hindrance for this rally. The magnitude of correction following this rally will give us the answer to the all-important question – have the equity markets bottomed yet?

Medium-term trend in Sensex is up since the trough at 8047 and is still going strong. Trend following methods dictate that investors should stay on the right side of the move until it reverses. A close below 10200 will be the first indication that the medium-term trend is reversing. But some caution would be handy since Sensex is close to the first long-term resistance zone explained above.

We are ambivalent as far as the short-term outlook is concerned. The short-term trend in Sensex is sideways between 10650 and 11350. Decline below the lower boundary will pull Sensex to 10450, 10200 and 9500. Rally above 11350 can take the index higher to 11600 and 11856.

Nifty (3480.7)

The short-term trend in the Nifty too is sideways between 3300 and 3500. Short-term traders can buy in declines with a stop at 3250. Upper target on a break-out above 3500 are 3550, 3636 and 3684. Supports for the week would be at 3236 and 3170.

A close below 3170 would be the first indication of a medium term trend reversal. As explained earlier, a strong counter-trend rally is in force since 2539. The first target for this move lies between 3480 and 3680. If this zone is crossed, the next target zone is around 3820.

Global Cues

Global markets appeared to be biding their time last week, deciding which way to go next. Most global indices moved sideways without making any headway either up or down. CBOE VIX spiked up from a three-month low of 33 to 40 on Tuesday before easing downward to close the week at 36 implying that investors were getting slightly edgy at the rally that is showing no signs of reversing.

After the sharp downward jerk on Monday, DJIA recovered to end with a mild loss. This index has been moving sideways between 7800 and 8100 since the beginning of this month. A break-out beyond either boundary should set the intermediate term direction for this index and rest of the global equity indices. — Lokeshwarri S.K.

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