Index Outlook: Temper hope with caution

With both the Sensex and the Nifty having shattered the ceiling that had impeded their progress over the last four weeks, most investors are now in a quandary whether to go on a shopping spree or to wait for a correction. The second option is advisable, if you are an investor.

In their current euphoric state, market participants are turning a blind eye to a host of factors that renders stock prices vulnerable to a sudden pull-back in the days ahead. As Julius Caesar was warned, beware the ides of March.

A combination of short-covering by traders -- who were betting on a decline from the previous highs-- and speculative buying appears to be propping this rally. A look at the sectors and stocks that drove the market higher on Friday does not lend much comfort.

The primary reason for this rally – the conviction that the NDA will form the Government – is not a certainty. An alternate result, including a shaky coalition, cannot be entirely ruled out. Again, as the election date draws near, data from various opinion polls is likely to fluctuate wildly, making stock prices gyrate.

The stock market has also brushed aside the Ukrainian problem too early. The outcome of the Crimean referendum to join Russia is yet unknown, there were reports of armed men attacking a Ukrainian base on Friday and Russia has warned that it will halt natural gas supply to Ukraine due to unpaid bills of almost $2 billion. Any escalation in tensions there could see volatility return to the global markets.

The market’s bugbear, Fed tapering of its bond re-purchase program, will also once again move into the limelight with the next FOMC meeting scheduled on March 19.

With a strong non-farm payroll data announced on Friday, the Federal Reserve pushing ahead with its taper schedule by reducing the bond re-purchase by another $10 billion becomes possible now. US 10-year treasury yields have risen to 2.79 per cent reflecting market expectations of reduction in demand for these bonds.

The silver lining is that economic data released last week were conducive. The country’s current account deficit dropped 0.9 per cent of GDP and services and manufacturing PMI improved.

The industrial production and inflation numbers set for announcement next week can provide us with further clues about the state of the economy.

The Sensex broke past its previous high of 21,483 to close 800 points higher.

The week ahead: The index has also closed near the intra week high. The momentum can take the index a little further from these levels. Immediate targets for the Sensex are 22,537 and 22,758. The Sensex has a strong resistance around the 22,500 level. So, investors should watch their step around this level. Supports for the week are at 21,483 and 21,208. Short-term view will turn negative only on close below 21,208.

Medium-term view: The Sensex broke past the 21,500 ceiling last week implying that the third wave from the 17,449 low is currently unfolding. This wave has the targets of 21,844 and then 23,007. If we extrapolate the move from the low of 15,135 on the Sensex, we get the next target at 22,758.

The former high at 21,483 will turn into a key support for the weeks ahead. The outlook will remain rosy as long as this level holds. The key medium-term trend deciding level now is at 20,737.

The Nifty, too, has closed above the psychological resistance at 6,500 last week -- near the intra-week peak.

The week ahead: The immediate upward target is at 6,688 and 6,728. Traders can continue to hold their long positions as long as the index trades above 6,415. A close below this level will mean that the uptrend is at an end. Subsequent supports are at 6,300 and 6,164.

Medium-term trend: The medium-term trend in the Nifty has turned positive now. It is obvious that the third leg of the move from the 5,119-low is currently unfolding. This wave has the targets of 6,688 and 7,156. Investors need to watch out as the index nears 6,688 as this level occurs in multiple e-wave counts.

Those holding longs can stay sanguine as long as the previous peak at 6,415 holds. The medium-term trend deciding level now is at 5,770.

The Ukrainian issue made all global markets record deep declines on Monday. But prices reversed from Tuesday helping the benchmarks erase losses and close on a positive note. Investors also appear to have regained confidence in the sustainability of the ongoing rally. The CBOE VIX that spiked to 16.8 on Monday fell to end the week at 14.

European indices were more volatile than the rest with indices such as the DAX, CAC and the FTSE 100 recording deep declines on Friday. The Dow recovered from the fall in the early part of the week to end 131 points higher. Since the index has moved above the hump at 16,100, a move to the former peak at 16,588 appears likely. Other Asian indices recorded mild gains last week. But the Nifty has outdone them all.

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