Index outlook: Summer of discontent

Sensex (18,326)

There is something about May. Equity markets somehow seem to lose their way in this month, making stock prices edge lower. Perhaps it has something to do with the languor induced by the scorching sun or the fact that most investors prefer to take off for a vacation leaving the field open to the bears.

Hike in fuel price and worries regarding inflation made equities start the week on a wobbly note. The two behemoths of Indian capital market, SBI and ONGC came under the hammer and the steep decline in these stocks pulled the Sensex close to the 18,000-level midweek. The shenanigans of the IMF chief and the sparkling debut of LinkedIn were other sidelights of an event-packed week.

Volatility is likely to be high next week too as the derivative contracts of the May series roll in to expiry. But given the lacklustre volumes and relatively lower open interest, a sharp move in either direction is unlikely. Index put call ratio below 1 also denotes that the market could be oversold and a bounce is possible in the near future.

A hammer formation seen in the weekly candle-stick chart could imply a short-term bottom. But the short lower shadow of this formation means that we can not take this formation too seriously. The Sensex is moving sideways with a downward bias over the last two weeks.

The oscillators in the daily chart continue in the bearish zone and the 10-day rate of change oscillator turned lower from the zero line implying that the near-term view remains negative for the index. The weekly oscillators are signalling that any further drop will make the medium-term view negative as well.

A five-wave formation could be complete at the 18,020 trough and a rebound is likely that takes it higher to 18,705, 18,915 or 19,126. The first target is the one that short-term investors need to watch since the 21 and 50-day moving averages are also positioned there. A rebound that gets halted around 18,700 will imply that the index can move on to the medium-term targets at 17,761 and 16,493.

On the other hand, move above the barrier around 19,126 is needed to indicate that the risk of downward reversal is mitigated for the short-term. The presence of the 200 DMA at this level adds to the significance of this resistance.

It is likely to be a bumpy ride for investors next week. Immediate resistance for the index is at 18,455 and 18,560. If the index fails to move beyond these levels early next week, it will mean that it can decline to 18,070 or 17,800 over the subsequent sessions. Move above 18,560 will take the index to the resistance zone around 18,700.

Nifty (5,486.3)

The Nifty dipped to the low of 5,401 before recovering last week. If this bounce sustains, then investors should watch out for the resistance around 5,608. The presence of both the 50 and 21-DMA at this zone and the short-term peak at 5,605 will offer considerable short-term resistance. Failure to move beyond this level will also mean that the down move from 5,944 peak will extend further and could move towards our medium-term targets of 5,332 or 4,954.

The risk of short-term downtrend will, however, be negated only on a close above 5,738. Since the 200-DMA is also positioned here, the medium-term trend will turn neutral once the index closes above this level.

For the week ahead, the index will face resistance at 5,530 and 5,563. Inability to move above these resistances would be the cue for traders to initiate fresh short positions with the target of 5,400 and then 5,305. Resistance above 5,563 is at 5,605.

Global Cues

Investors may be taking some money off after the recent rally checked price rise in the US and other developed markets. Most global benchmarks closed a notch lower last week. The CBOE Volatility Index remained at elevated levels between 15 and 19 reflecting nervousness among investors. Most European indices recorded third consecutive week of down close.

The Dow too recorded the intra-week low of 12,378 as indicated in the last column and is currently attempting to hold above it. We stay with the view that the short-term outlook will stay positive as long as the index holds above the support zone between 12,350 and 12,400. The medium-term trend deciding level is 11,640. The 50-DMA at 12,380 is likely to be tested next week as well. Close below this level will pull the index to 12,090 in the upcoming sessions.

Greece All Share Index continued to plumb to new depths and closed at a new 14-year low last week. The dollar index retracted from the key resistance at 76.3 indicated last week to close almost 5 per cent lower giving much-needed comfort to commodities. But on the flip-side, inability on part of the dollar index to move higher means that the medium and long-term trend in this index continues to be down.

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