Sensex (17,955.8)

Both the Nifty and the Sensex recorded 29-month highs last week. But there was not a single celebratory beep from the market. This cynical attitude is hardly surprising given the numerous attempts made by the benchmark to ‘break out' over the last nine months. As the earnings season gathers momentum, stock-specific action is expected to dominate trading in the week ahead.

Investors should, however, keep looking over their shoulders for developments in global markets. The Sensex could have moved beyond the 18,000 impediment had benchmarks such as Dow, S&P 500 or DJ Euro STOXX 50 maintained their uptrends. But the setback these indices suffered on Friday implies that a choppy period awaits global equities in the weeks ahead. If the correction in developed markets gets deeper, global investors could be tempted to pull money out of emerging markets such as India and Indonesia, where they are sitting on substantial profits.

Volumes were good in both cash and derivatives as stock prices moved resolutely higher. Foreign institutional investors were net buyers last week while the domestic institutional investors adopted a more cautious stance and opted to cash out. Open interest has crossed Rs 1,50,000 crore. And what is worrying this time around is that stock futures make up Rs 42,000 crore, implying heightened retail activity.

The index has moved to a two-year high. But the moot question is if it has the strength to move higher from these levels. Traditional tracking methods signal that the trends along both short- and medium-term time-frames are up. This fact is borne out by the oscillators in daily and weekly charts pointing northward. The index is also above its long-term averages.

The uptrend from the 15,960 low is still going strong. The Sensex would have to decline below 17,300 to negate the positive medium-term view and usher in a deeper correction. But the resistance around 18,000 appears hard to surmount just yet and weakness next week could mean a consolidation phase between 17,300 and 18,200 for a few more weeks before the index makes a decisive move in either direction.

The intermediate-term trend in the index is still sideways. The slightly higher peaks and troughs since last November do impart a positive bias to this up-move but investors need to get wary every time the index nears the upper boundary of its intermediate term range between 15,500 and 18,000. If other global markets go into a deeper decline, the Sensex could head towards its base at 15,500 again.

The index could start the week on the back-foot due to the reversal in US equities on Friday. Immediate supports are 17,690 and 17,395. Short-term investors can hold their purchases as long as the Sensex trades above 17,300. Subsequent supports are 17,053 and 16,795. Resistances for the week would be at 18,167 and 18,323.

Nifty (5,393.9)

The Nifty recorded the intra-week high of 5,453 before reversing lower on Wednesday. The short-term trend in the index is up and supports for this time-frame are at 5,363 and 5,312. Traders can hold their long positions as long as the index trades above the second support. The index could face resistance at the recent high of 5,453 in the days ahead. Target above is 5,500.

But caution is advised from a medium-term perspective since the index is near the upper boundary of its medium term range. Reversal from here would pull it lower to at least 5,200 over the ensuing weeks. Traders should therefore close their long positions on a decline below 5,300.

Global Cues

Steep drop in University of Michigan's Consumer Sentiment Index and weaker than expected revenue growth reported by Bank of America and Citigroup sent stocks in US scuttling lower, bringing back doubts regarding the sustainability of this rally on Friday. Benchmarks in Europe and US were again the first to reverse lower. CBOE VIX hit the low of 23 on Tuesday and reversed from there to move on to intra-week peak of 28 reflecting the edgy mood among the trading fraternity.

Dow moved to the peak of 10,408 before reversing lower on Wednesday. That the index was unable to sustain above its 200-day moving average is a cause for worry.

The lower peaks and troughs formed since the April 26 peak also imply that the medium term downtrend is far from complete.

Immediate support for Dow is 9,950. Breach of this level will take the index to 9,614. Close above 10,650 is required to negate the bearish medium term view.

The pattern in S&P 500 is more worrisome. This index has retraced 38.2 per cent of its prior up-move and is once again moving lower. If this is the third wave from the April peak, the index could even decline to 970.

— Lokeshwarri S.K.

Related Stories:
Index Outlook: Edging towards new high
Sensex recedes after hitting 18,000

(This article was published in the Business Line print edition dated July 18, 2010)
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