The Hindu Business Line : Index Outlook

The weekly candlestick chart of Sensex in which a small star is hanging high above the up-move recorded so far says it all. The fantastic outburst on Monday has taken Sensex in to a different orbit altogether. Though there could be no denying the fact that the reaction was disproportionate to the implications of the electoral verdict and a trifle overdone, Indian investors would be a happy lot this week since their equity portfolios are now sporting a healthy glow.

We had expected a euphoric reaction on Monday morning but the 20 per cent surge in Nifty was just a little short of hysteric. Once sanity was restored in large-cap stocks, the frenzy shifted to mid and small-cap stocks. Record turnover was witnessed in both cash as well as derivative segment on Tuesday when market participants were able to execute trades. Massive FII inflows only fanned the buying ardour as they pumped in over $1 billion on Tuesday alone.

Momentum indicators in the weekly chart are extremely overbought. The 10-week Rate of Change oscillator is currently at a level not attained in the last 10 years. The 14-week Relative Strength Index is at a level last seen in the last quarter of 2007. The inference is that Sensex is overbought from a medium-term perspective. The long-term oscillators are however just approaching the bullish zone indicating that the long-term trend continues to be down.

We had expected the rally from 8047 low to halt below 13200 but the index moved beyond our outer target of 14500 to an intra-week peak of 14930 on Tuesday. The question that is frequently asked these days is if this is still a bear market rally or the resumption of the long-term bull market. We maintain that the rally from March 2009 low is a counter-trend rally or the B wave in a bear market. Counter-trend rallies retracing 50, 55 or 61.8 per cent of prior down-move is quite common. This view will be revised only on a strong close above 16000.

The other question that is frequently asked is – will the Sensex decline to March 2009 lows again? The next leg down or the C wave would have been ferocious had the Sensex been unable to move beyond 13200; a move below 8000 was a strong possibility then. But thanks to the exuberant reaction to the election verdict, the strength of the next wave down can be greatly diluted and the index can halt around or even above the March lows.

The point that gives rise to optimism is the fact that given the magnitude of the decline from 21206 peak (64 per cent), bulls have managed a rally that retraced more than 38.2 per cent. This implies that the bear stranglehold has eased substantially and bulls have the opportunity to wrench the controls from here.

As we have been reiterating over the past month, the medium-term trend continues to be up and it will be perilous to initiate trades against this trend unless clear signals are received about a trend reversal. A close below 12173, the floor of the gap formed last Monday, would be the first requisite to signal a medium-term trend reversal. The long-term 200-day moving average at 11,000 would be the next medium-term support level. If Sensex holds above 13500, next medium term target would be 16200.

The wave counts of the move from 8047 low that had been unresolved up to now have become fairly clear after last week’s move. A 5-3-5 zigzag is apparent now with the third of the c wave completing last week. The index can move in a range between 13300 and 15700 for a few more sessions before this formation ends.

Volatility is expected to be high next week as the May derivative contracts move towards expiry. The ceiling of the gap formed last Monday at 13480 would be the support to watch in the near term. Subsequent supports are at 13300 and 12900. Upper targets for the week are 14547, 14930 and 15127.

Nifty (4238.5)

It was up, up and away for the Nifty as well; the index recorded an intra-week peak at 4509. The doji cross formed at that level indicates that bulls and bears are evenly poised at that level. If we consider the retracement of the down-move from January 2008, next intermediate term target for Nifty is 4800. However, B waves can end around the 50 per cent retracement level too and Nifty has already attained that target. The up-move from March lows can reverse now after a few sessions of sideways movement between 4150 and 4600.

Immediate supports in the week ahead are at 4140 and 3900. Upper targets for the short-term are 4428, 4500 and 4597.

Global Cues

It was a relatively sedate show by other equity markets. Though there were no run-away rallies of the kind witnessed in India, most of the other markets ended the week on a positive note after regaining the losses made in the previous week.

CBOE volatility index declined to pre-Lehman-collapse level of 26.5 reflecting the rising level of complacency among investors.

The Dow is moving in the range between 8250 and 8650 since the first week of May in what appears to be a halt before the next leg of the medium term uptrend unfolds to take the index to 9000 or 9500. As indicated earlier, the index needs to close below 7750 to mitigate the positive medium term view.

Sri Lankan equities too surged higher and the Sri Lanka All Share Index gained 12 per cent with the resolution of the ethnic issue dogging the nation.

Commodities driven Latam markets had a stellar run last week; stock markets in Argentina, Mexico, Chile and Brazil closed with strong gains. — Lokeshwarri S.K.

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