Portfolio

Index Outlook: Cracks in the trend

LOKESHWARRI S. K. | Updated on March 12, 2018 Published on November 23, 2013

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Signs of stress are beginning to appear in the weekly and monthly momentum indicators. Any further decline can affect the medium term outlook.

If you are unsure about what a ‘dead-cat bounce’ is, all you need to do is to see the Sensex and Nifty movement last week. There was a thundering rally on Monday on talks of epochal reforms in China.

But the euphoria lasted just one day as the analyst fraternity got into the act to punch holes in the 60-point programme.

The Sensex that had rallied 451 points and the Nifty that had risen 133 points on Monday fell back with a thud to end the week with losses.

The ostensible reason for the sell-off in the later part of the week was the revelations in the minutes of the FOMC meeting that it was still watching US economic data to begin reducing its bond re-purchase programme.

Indian investors, due to the want of any domestic data releases, spent their time obsessing over global events.

Next week promises to be more exciting with the November derivative contracts rolling into expiry. Bulls will have to decide by Thursday if they want to roll over their long positions or if they want to close it. Volumes in the derivative segment of the National Stock Exchange have already hit record levels in the second part of the week. September quarter GDP numbers will also give us something to ruminate on.

The actions of the foreign institutional investors will be of particular interest to investors.

There was a lot of hand-wringing over FIIs turning net sellers in Thursday’s session.

It needs to be remembered that the actions of these investors are closely linked to the rupee. If the rupee sashays below 63 again, the outflow could accelerate. The oscillators in the daily chart have declined deep into the negative zone. But it is the weekly and monthly oscillators that are more worrisome. The weekly rate of oscillators is reversing from the oversold zone.

The relative strength index for this period has also moved into neutral from over-sold zone.

Monthly oscillators continue to show negative divergence, that belies strength in this uptrend.

The 10-month rate of change oscillator is threatening to move into negative zone. If it does, it will mean the end of the uptrend from January 2012 low.



Sensex (20,217.4)

The Sensex moved in line with the second path outlined in the last column. It rallied to 20,880 and reversed from there to hit the next lower target also. The third part of the down-move from the 21,321 peak in the Sensex has the targets of 20,217, 19,774 and 19,057. In other words, the Sensex can reverse from the current levels as the first target of the third leg has already been achieved.

But if the index moves below 20,161, the short-term downtrend will accelerate. Retracement targets on decline below 20,161 are 19,842, 19,398 and 18,937.

Any rebound next week will face resistance at 20,650 and 20,940.

The negative short-term view will reverse on a close above the second target. We stay with the view that a close below 19,840 is needed to put the positive medium-term view under pressure.

Halt above this level will keep open the possibility of another new high this calendar.

Nifty (5,995.4)

The Nifty moved to an intra-week peak of 6,212 and reversed to hit the low of 5,972 on Friday.

If we extrapolate the down-move that began from 6,342, we get the targets of 5,982, 5,841 and then 5,611. It needs to be seen if the index is able to reverse from the current levels. Sideways move between 6,000 and 6,350 can then ensue.

But a strong move below 5,972 will bring the other two targets into play.

The Fibonacci support at 5,924 and the 200-day moving average at 5,862 are the levels where traders need to become cautious with their short positions.

Any reversal early next week will face resistance at 6,123 and then 6,215.

Short-term traders can continue to play short as long as the index stays below the first resistance. Short-term trend will turn positive on close above 6,215.

Global cues

US markets are on a high with the S&P 500 closing above 1,800 for the first time in history and the Dow above 16,000. This is the seventh consecutive weekly closing highs for both these indices. The valuation of S&P 500 has moved above long-term average making a section of investors there cautious about an impending sell-off. But CBOE volatility index close to the lower end of its long-term base implies that traders are not anticipating decline. With the Dow now above 16,000, the short-term supports have to be shifted higher to 14,727 and 13,874. The short-term trend will remain positive as long as the index trades above the first support.

There is no alteration in the medium-term targets at 16,471 and 16,688 in the Dow. We also retain the medium-term support at 13,675. The Hang Seng and the Shanghai Composite recorded sharp upward moves last week. But these indices have a long way to go before we can see a sustainable uptrend in unfurling.

>lokeshwarri.sk@thehindu.co.in

Published on November 23, 2013
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