Index Outlook: Bulls back in business

Bulls who were fighting with their backs to the wall could wrest advantage from the bears. This was largely due to some soothing statements from the Finance Minister that foreign investors investing through Mauritius need not worry about the taxman putting them under the microscope. Moody’s prophesy that the worst may be over for the Indian economy and that it could grow at 7 per cent from 2014 also helped improve the sentiment on the street.

Cues from overseas were also supportive with most global benchmarks etching gains. Indian investors’ worries about flow of foreign portfolio funds into the Indian markets appear overdone since a large chunk of these funds are linked to the India allocations of global emerging market funds.

According to EPFR Global, Emerging Markets Equity funds posted inflows for the 26th time in the past 27 weeks in early March. Flows into Asia ex-Japan Equity Funds continued to be strong last week. It is, therefore, not a surprise that benchmarks of countries such as Indonesia, Philippines and Thailand have been hitting new life-time highs regularly this calendar. Indian equities have also received close to $9 billion so far this calendar though stock prices have been on a roller-coaster ride.

Daily oscillators turned positive after last week’s rally. Relative strength index in the daily chart has moved in to the bullish zone and the moving average convergence divergence oscillator is now giving a buy signal. The good news is that the weekly oscillators that were beginning to dip into negative zone have reversed higher again. The week ahead will be critical to determine the medium-term trend in the market.

Sensex (19,683.2)

The Sensex outdid our short-term expectation last week, reversing from Monday’s low of 18,760 to gain almost 1,000 points. It is needless to add that the short-term trend has turned positive for the index. But investors need to tread a little carefully at this juncture.

For the index has reached key short-term resistance point at 19,658. This occurs at 61.8 per cent retracement of the decline from the 20,203 peak. Fresh purchases should be contemplated only if the index continues to move higher and records a firm close above 19,658. Short-term supports for the index are at 19,343 and 19,120.

The Sensex is currently poised at a critical point from a medium-term perspective. If we consider the up-move from the 15,748 low, the index completed one leg when it recorded the peak of 20,203 in January.

A correction is on since then. This correction retraced 32 per cent of the previous rally when the index hit the low of 18,793. This decline is sufficient to qualify as a shallow correction in a strong up-trend. There are three scenarios that can unfold now,

a) If the third part of the move from 15,748 has begun last week, the index will power past 19,700 and go on to 21,108 or even 21,513 in the months ahead.

b) The bearish scenario will unfold if the index reverses lower early next week. In that event it will fall to 18,800 or 18,263 in the medium-term.

c) The third is a more neutral scenario where the index can go on to the recent peak at 20,203 and reverse from there again, thus establishing a trading band between 18,500 and 20,200 for few more weeks.

The Nifty (5,945.7) too reversed from Monday’s low of 5,663 to gain 5 per cent. The rally last week has brought the Nifty to key short-term hurdle at 5,946. The medium-term trend in the index is dependent upon the movement of the index next week.

A strong close above 5,946 will open the possibility of the current rally being the third wave of the move that began from the June 2012 low in the index. Minimum upper targets as per this count are 6,338 and 6,492.

If the Nifty is unable to move strongly past 5,950, it will imply that the short-term down-trend that began from the 6,112 peak continues to be in force. The index can then be expected to decline to 5,679 or 5,511 in the weeks ahead.

The third scenario is that the index spends some more time vacillating in the band between 5,650 and 6,100 before breaking higher.

Traders too need to exercise caution early next week. Fresh long positions should be considered only on a strong close above 5,950. Next target for the index is 6,112.

Short-term supports for the Nifty are placed at 5,844, 5,776 and 5,663.

Global cues

Global markets rallied strongly last week with the US indices surging to record highs. The Chinese Government’s move to tighten the boom in property market and North Korea’s threatened nuclear strikes did not dampen investor sentiment. CBOE volatility index declined to close at 12.5, implying that investors are betting on the rally in stock prices continuing.

The Dow Jones Industrial Average gained over 300 points to close at a new life-time high last week. Next medium-term target for the index is 15,730. The index, however, needs to maintain the upward momentum over another two weeks to ensure that last week’s move is not a false break-out. The short-term view for the index will turn negative only on close below 13,600.

It is not just the US indices that raced higher last week. The European indices including the FTSE, CAC and DAX also registered strong gains. The DAX is just whisker’s breadth away from its 2008 peak.

There was a spectacular 5 per cent move in the Nikkei last week that took it past the important long term hurdle at 11,400. Investors appear enthused about the ability of Japanese Prime Minister Shinzo Abe’s ability to rekindle economic growth.

lokeshwarri.sk@thehindu.co.in

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