The Hindu Business Line : Index Outlook: Sensex wavers around 16,000

Market was at its whimsical best last week. Stock prices appeared to be rolling down a deep chasm last Tuesday but just when most market participants were convinced that the downtrend was going to be long-drawn and painful, stock prices reversed higher, once again trapping short-sellers.

The week ahead could flow along similar lines as bears try to wrest control from the slightly nervous bulls.

Intraday volatility was also extremely high as prices swung both ways exasperating the trading fraternity. Volume was subdued in the cash segment while it was quite brisk on the derivative side. Stocks received support from both foreign and domestic institutional investors last week. Open interest has crept above Rs 90,000 crore again but increase in short positions can help to cushion declines.

Momentum indicators in the weekly chart continue to point southward. The 10-week rate of change oscillator is perched on the zero line. Decline in to negative zone will denote that a protracted medium term down-trend would follow.

Oscillators in the daily chart have reversed higher but they continue in the bearish region implying that near term outlook remains cloudy. Sensex also remains below its 50-day moving average positioned at 16450.

The short-term trend in Sensex is down since the peak of 17,493 but one leg of this down-move was completed last Tuesday at 15,330.

The pull-back witnessed in the later part of last week has not progressed enough to signal that the correction has ended. There are multiple wave counts at this point and we would like to see the movement next week before determining the medium term trajectory for the index. Movement next week can flow along either of these paths,

If Sensex makes no headway next week and reverses below 16,300, then a decline to 14,940 or 14,120 can be expected in the near term.

If the index moves up to 16,700 but is unable to move beyond this level, a sideways move between 15,300 and 16,700 can ensue for a few more sessions.

Short-term outlook will turn overtly bullish on a move above 16,700 paving the way for the rally to progress to 17,500 or even 18,000.

Our preferred view is that the index attempts to move to 16,700 and then spends some time consolidating sideways. Investors however need to stay cautious as long as Sensex trades below 16,700.

If there is a sharp decline, Sensex will find support in the zone between 14,700 and 15,000 in the near term.

Nifty (4,796.1)

Nifty declined to 4,538 in the first session of the week before staging a rally to close 84 points higher.

The index has closed above the key 4,700 level after testing our first downward target of 4,581 briefly. A five-wave move was completed at last week’s low. But it is not yet clear if this is the end of the correction from 5,182 peak or if this down-trend will have legs that take it lower. Some guidelines for next week’s trading are,

If the index struggles to move above 4,800, it would imply that there can be a decline 4,540 or 4,450 in the near term. Target on a decline below 4,450 is 4,190.

A pull-back rally that halts around 5,000 will result in a sideways move between 4,500 and 5,000 for a few more sessions.

Strong move beyond 5,000 would imply that the worst is over and the index is headed towards 5,300.

Our preferred view in the second one in which the index moves between 4,500 and 5,000 for a few more sessions. The medium term view will stay negative unless there is a close above 5,000.

Global Cues

Global benchmarks stabilized last week and pulled back to close the week in the green. It is however not yet clear if the correction that began around October 20 is complete or if this is a minor pull-back in a larger down-trend.

CBOE VIX fell sharply to close 24 per cent lower from the peak of 31.8 recorded on Monday implying that trading sentiment has once more swung towards optimism.

It is the show of resilience in the Dow that is very surprising.

This index dropped less than 5 per cent in the recent correction and is already close to its recent peak, having retraced all the lost territory.

As long as this index stays above 9,600, the possibility of another lunge towards 10,500 levels remains open. Corresponding target for S&P 500 is 1,160.

— Lokeshwarri S.K.

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