The Hindu Business Line : Index Outlook: Commodities steal the thunder

Market participants straggling in to trade last Tuesday were shaken out of their festive stupor by stocks doing a volte-face and heading southwards. Sensex ended the week below 17,000 while Nifty closed below 5,000. Investors should brace themselves for a roller-coaster ride next week as October derivative contracts roll into expiry against the back-drop of the RBI’s monetary policy review and the continuing flow of earnings announcements.

Attention shifted from equities to commodities last week as a weakening dollar sent most commodity prices sky-rocketing. CRB Index that tracks the movement of commodities rose above 470 as crude topped $80 a barrel and gold climbed above $1,060 an ounce again. We retain the view that the CRB index can rise to 480 or 518 before this leg of the rally terminates. The implication for equities would be that the global funds can start chasing commodities again, allowing stocks to take a breather.

Volumes were tepid and breadth too was indifferent through last week. FIIs were net sellers in the second half of the week while domestic institutional investors were net sellers all through.

Interestingly, though the Sensex moved beyond the 61.8 per cent retracement of the previous fall at 16200, BSE 500 has only just reached this level and is facing difficulty moving beyond it. BSE mid-cap index has retraced only half of last year’s losses while the small-cap index has not even reached the half-way mark yet in recouping its losses. Oscillators continue to advise caution. Three consecutive down closes last week resulted in the 14-day relative strength index declining below 55. Weekly momentum indicators continue to exhibit negative divergence, but they are moving sideways since August. The Sensex has alternated monthly gains with losses since June this year. October appears set to continue this pattern since the index is already down over 300 points this month.

A five-wave pattern did come to an end last week and the Sensex is currently in a corrective mode. Since the up-trend that has been in place over the last two months is currently being corrected, the decline can persist for a couple of weeks more. But possible levels where this correction can halt are 16,650 and 16,419, which are not very far away.

A rebound above these levels can make the correction take the shape of a sideways move between 16,400 and 17,500.

The move outlined above will retain the bullish medium term perspective and keep open the possibility of a surge to the 17,800 or 18,000 before the rally from 13,219 terminates. Close below 16,000 is needed to signal the end of the medium term up-trend.

A rocky ride is expected next week as the presence of a slew of supports in the vicinity will provide the platforms from where bulls can stage a recovery. The Sensex can decline to 16,650, 16,482 or 16,419 in the early part of the week.

A rebound is possible from either of these levels. But a decline below 16,419 will take the index to the key medium term support of 16,230. Resistances will be at 17,198 and 17,500. Bears will have the upper hand as long as the index trades below the first resistance.

Nifty (4,997)

The Nifty declined from the peak of 5,182 recorded on Tuesday to end the week 3 per cent lower.

The short-term trend in the index is down and traders can initiate short positions in rallies with a stop at 5,100.

Move above 5,100 will turn the short-term view neutral again. It, however, needs to be borne in mind that there might not be a deep decline in the near term since the index has the immediate targets of 4,926 and 4,862.

The 50-day moving average at 4,805 will also be a reliable support in declines and traders holding short positions need to be extra vigilant of reversals from these levels.

As explained last week, one leg of the up-move from August 19 low could have ended in the Muhurat session and the correction that follows is expected to last at least couple of weeks more. The cut can however be shallow and halt in the zone between 4,850 and 4,900.

The intermediate term view for the Nifty stays positive as long as it holds above 4,700. But a sideways move between 4,800 and 5,300 is envisaged for a few more weeks as the move that began in July completes itself.

Global Cues

Equities had a turbulent week but most benchmarks held on to the gains made in the previous weeks. Markets with greater concentration of commodity stocks performed well .

Dow appeared a trifle nervous at the 10,000 mark and closed the week marginally in the red. But the short and medium-term trends in the index continue to be up.

Close below 9,830 is required to turn the short-term outlook negative for this index.

If this level holds, medium-term target remains between 10,350 and 10,500.

Since crude oil has moved beyond the resistance at $75, next target for the commodity is $90. 1:1 extrapolation of the move from February lows makes even $100 a barrel possible soon.

— Lokeshwarri S.K.

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