Index Outlook: Stocks climb a wall of worry

Sensex (18,815.6)

Indian stock market continued in a capricious vein last week too. It shrugged off a slew of negative news such as intensifying strife in West Asia and the resultant spike in crude oil prices, Japan grappling to stem nuclear leak, higher food inflation and so on to trip merrily higher. Short covering spurred by the impending expiry of March derivative contracts helped.

Surprisingly, rest of the global markets joined India in moving higher too. Perhaps investors have reached a saturation point as far as the capacity to absorb bad news goes. Institutional investors turned gung-ho last week with FIIs buying close to Rs 2,200 crore worth of shares while DIIs bought around Rs 1,300 crore.

Derivative expiry next Thursday should lead to stocks rising further as traders, who are short, cover their position. Relatively lower open interest around Rs 1, 50,000 crore should help in curtailing the volatility. Quarterly earnings set to roll out from the first week of April will also set the tone for stock-specific moves.

The Sensex reversed from the low of 17,792 recorded on Monday to close the week 936 points higher. Oscillators in the daily chart reversed smartly to move in to bullish zone. Weekly rate of change oscillator is on the verge of crossing the zero line from below. This denotes that this uptrend needs to progress further before the medium-term view turns positive.

The medium-term trend has not been altered by last week's rally. The Sensex has been moving sideways between 17,500 and 18,750 over the last six weeks. The index closed slightly above the key medium-term resistance at 18,750 last week. We had mentioned that the risk of a sharp decline will remain as long as the Sensex traded below this level.

Though the index has crossed this level, we would like to see it progress a little further beyond the next resistance zone between 18,950 and 19,060 before we can change the medium-term outlook to neutral. The presence of the 200-day moving average at 18,950 makes it an important hurdle in the near-term. Once this zone is crossed, the index can go on to 19,200 or 19,650. The trading band for the Sensex will then shift to 17,000 to 20,000 for the rest of this year.

Conversely, if the Sensex retreats from the area around 19,000, it will mean that the bears are still in command and can drag the index to the February low again.

The momentum generated on Friday can take the Sensex higher to 18,950 or 19,060 in the days ahead. Reversal from this zone will pull the Sensex to 18,600, 18,460 or 18,215. Short-term outlook will turn negative on a close below the second support.

Nifty (5,654.2)

The Nifty too recorded a strong surge on Friday that helped it tide over the resistance at 5,650. But we need to put in a filter of at-least two more closes above this level to protect against false break-out. If we extrapolate the move from 5,242, we get the targets of 5,702 and then 5,837. The 200-day moving average is positioned at 5,690. Therefore traders need to stay watchful with their long positions as long as the index trades below the 5,700.

Strong close above this level will take the index to 5,760, 5,837 or 5,895. On the other hand reversal below 5,700 can keep the index in the range between 5,350 and 5,700 for few more weeks.

Short-term supports are at 5,545, 5,470 and 5,348. Traders can play long as long as the index trades above the first support.

The medium-term trend remains unclear. Next week's movement can give us better clarity on that.

Global Cues

Most global indices moved higher in a pull-back rally from the lows recorded the previous week. This rally needs to sustain for one more week before we can conclude that the worst is over. The sharp decline in CBOE VIX from the peak of 31.3 to 17 however shows that investors seem confident that the correction since February was just a short-term pull-back.

The Dow rallied strongly to close the week 3 per cent higher. Since the index has moved above the resistance at 12,080, it can attempt to cross the recent peak at 12,391. Next medium-term target for the index is at the May 2008 peak of 13,132.

The Nikkei built on the reversal of the previous week by closing 3 per cent higher.

Close below 8,750 is needed to signal that the long-term downtrend has resumed in the index. Else it can continue to trudge higher.

Most other Asian benchmarks also closed the week on a positive note. The dollar index flirted with the support at 75.6 for few sessions before moving up on Friday. Surprisingly, commodity prices also perked up with gold and silver hitting record highs.

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