The Hindu Business Line : Index Outlook — Mapping Budget day moves

The day of reckoning for the UPA Government is here. The Union Budget will demonstrate the extent to which the hopes and expectations woven in to the post-election rally will be translated in to action.

Indian equities edged sideways for most part of last week before an innocuous Railway Budget led to a flurry of last-minute buying on Friday afternoon, helping the Sensex close the week in the green. Monsoon spreading its reach also brought a bout of cheer to market.

The caution among market participants is justified since the Sensex is currently up 22 per cent from its pre-election result level of 12,173. Breadth was negative on many days last week and both the BSE mid- and small-cap indices closed the week on a flat note. Lower open interest, around Rs 72,000 crore too implies that traders are wary of holding leveraged positions on July 6. Foreign institutional investors have been nibbling at Indian stocks over the last five sessions.

Sensex moved in a very narrow range between 14,400 and 15,000 last week. This sideways movement has maintained the status quo as far as the oscillator charts are concerned. The 10-day rate of change oscillator that had declined in to the negative zone has clambered back above zero implying a neutral view for the short-term. The 14-day relative strength index continues in the overbought zone at 71.

As explained last week, the medium-term uptrend from the March lows is currently under duress. Sensex has key intermediate resistances at 14,626, 15,284 and 16,179 based on Fibonacci retracement levels of the previous down-move. The index is currently reversing lower from 15,600 positioned between the second and third targets.

A significant peak could already have been formed at 15,600. We, therefore, continue to advise caution from a medium-term perspective. A protracted medium-term down-trend can drag the Sensex down to 12,730 or 10,956 over the ensuing months. However, a decline below 13,300 is required to confirm a medium-term reversal.

A budget induced rally that takes Sensex above 15,600 will give the next medium-term target between 16,179 and 16,332 for the index.

Budget session

The only way to predict how the market will react to the provisions of the Union Budget is by gazing at the crystal ball. Since there is no crystal ball at hand, it would be best to be prepared for all three scenarios outlined below:

If the market gets ecstatic with the provisions of the budget, Sensex can rally upwards to 15,600 or 15,874 on the budget day. An unbridled rally will result in Sensex moving towards our medium-term target between 16,179 and 16,332.

A lackadaisical reaction to the budget can result in the rally getting stalled at 15,290 and the index moving lower towards 14,000 again.

An overtly negative reaction will pull Sensex down to 13,360.

To sum up, the medium-term trend from March lows is close to termination but a positive reaction to the budget can make it extend up to 16,300. The path of least resistance is currently downwards and there is a strong possibility of a medium-term down-trend commencing that takes Sensex towards 12,000 or lower.

Nifty (4,424.2)

The medium-term trend in the Nifty is also down since the peak of 4,693. If the third leg of this down-trend unfurls after the budget, it can drag the index lower to 4,094, 3,884 or even 3,544. If we consider the retracement of the up-move from the March lows, Nifty will get strong support at 4,051 and 3,876 and short-term traders can watch out for upward reversals around these levels.

On the other hand, a positive reaction to the budget will take Nifty higher to 4,546, 4,693 and 4,728. It needs to be remembered that the index has strong intermediate resistance at 4,646. Once this level is crossed, the next intermediate term target would be 4,904.

Global Cues

Global equities were unable to make headway last week and closed with marginal losses. CBOE Volatility Index (VIX) spiked higher on Thursday implying that investors were rattled by the sharp spike in the number of jobs cut in the US in the month of June. The VIX closed 7 per cent higher for the week. Asian equity markets were relatively resilient and managed to hold on to most of the gains recorded in the previous week. Shanghai Composite Index was the out-performer with 6 per cent gain.

Thursday’s sell-off in the Dow appears to be the commencement of the third leg down from the recent peak at 8,878. The targets of this wave are 8,198 and 7,962. Key support to watch over the next week is at 8,200. A strong close below this level will be the first indication that the medium-term trend is reversing in this index. As mentioned earlier, a close below 7,800 is needed to reopen the possibility of a re-test of the March lows. Target for the S&P 500 on a decline below the immediate support of 880 is 865.

— Lokeshwarri S.K.

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Index Outlook — Mapping Budget day moves