Index Outlook: Bears bullying the bulls

Sensex (17,728.6)

Bears stalked the street unhindered last week, unleashing a reign of terror. Stock prices hurtled down a bottomless cavern and benchmarks shattered key support levels. Negative news on various scams floated around, keeping investors edgy. This nervousness was further stoked by rumour-mongering and margin calls.

Surprisingly, the loss in Sensex was only 1.5 per cent last week. The pain was largely in the mid and small-cap universe with the BSE Smallcap index losing 6 per cent and Midcap index losing 4 per cent. FIIs were net sellers in most sessions, while DIIs stepped up their purchases.

Though the fall last week appears to have been triggered by domestic factors, it needs to be noted that some of our Asian peers such as Taiwan, South Korea and Hong Kong also lost between 4.5 to 5 per cent. Needless to add that markets in the US and Europe (see global cues below) are well and thriving clearly, pointing to shift in regional preference among foreign investors.

There is positive news awaiting our market on Monday morning in the form of the end of Hosni Mubarak's regime and the consequent dip in crude prices. That could support prices in the near-term. Ruminations on the upcoming Union Budget can also help distract market participants from the current despondent state.

The Sensex breached the support at 17,926 last Tuesday implying that the current down-move is correcting the entire rally from March 2009 low. We had indicated that minimum targets of such a correction are 17,189, 16,754 or 16,118. The Sensex almost achieved the first target last week.

If we consider the wave patterns of the move from 20,665 peak, the steepest part of this wave cluster, that is the third wave appears to be nearing completion.

The index could be volatile in the days ahead as the fourth and fifth waves complete making the index move in the band between 16,700 and 18,500.

Once this move completes, we can have a more sustainable rebound in the index. Since the decline over the last few weeks was very sharp and severe, selling pressure is likely to emerge at every rise, thwarting price increases. Medium-term trend in the Sensex will, however, remain under a cloud as long as the index trades below 18,700.

A minor recovery commenced last week. The movement next week will be critical for determining the medium-term trajectory for the index. Sustained recovery from these levels will mean that the index will move in a range between 16,000 and 21,000 for the rest of this year.

Decline below 16,000 will mean a sharp cut to 14,500 or below. But the pain will be short-lived in that case.

The Sensex will face immediate resistance in the zone around 18,000 – at 17,980 and 18,065 to be precise.

Reversal from these levels will drag the index down to 17,200 or 16,700. Strong close above 18,000 will be a big morale booster for the market and can cause the rally to extend to 18,165, 18,434 or 18,542.

Nifty (5,310)

The Nifty recorded the intra-week low of 5,178 but Friday's rebound helped the index close with a mild 1.5 per cent decline. It shattered the key support at 5,378 on Tuesday implying that the current correction is long-term in nature. In other words, the index is retracing the entire up-move from the March 2009 low of 2,539.

As indicated earlier, the minimum downward targets in the event of a long-term correction are 5,198, 5,071 and 4,886. The Nifty has already achieved the first target and that is some solace for the bulls. Even if we consider the patterns of the minor waves from the 6,178 peak, the third wave of this group of waves appears to be coming to an end. The index can take some more time to complete the fourth and fifth waves during which time the index can move in the narrow range between 5,070 and 5,450. The index needs to record a close above 5,650 to mitigate the bearish medium-term view.

Friday's rally will face resistance at 5,415 and then 5,450 in the early part of the week. Reversal from either of these levels will drag the index down to 5,218, 5,178 or 5,074. Next resistance zone for the index is around 5,550.

Equity markets in the US and Europe continued to move higher even as Asian stocks struggled to stay afloat. DAX went on to close the week at a three-year high, while the FTSE is also nudging levels last seen in May 2008.

As US markets moved higher, the CBOE VIX declined to its lowest level since June 2007 implying that sentiment is getting very bullish in the US. Asian and Latin American markets bled last week.

Equity prices in the Philippines, Hong Kong, Indonesia, Malaysia, South Korea, Singapore, and Taiwan closed 3-6 per cent lower. Surprisingly, the Shanghai Composite emerged unscathed, closing marginally in the green.

The Dow closed near the highest point for the week with 181 points gain.

Medium-term targets for the index stay at 12,444 and 12,896. The short-term uptrend will be threatened only if the index closes below 11,800.

Medium-term view will stay positive as long as the index trades above 11,450.

Nymex crude futures dipped sharply to $85.5 on Friday. A rounding top formation appears to be forming in this commodity but that would be confirmed only after a close below $85. Next downward target is between $80 and $82.

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