Portfolio

Index Outlook: Global cheer lifts stocks

| Updated on: Jul 02, 2011
IW03nifty_col.eps

IW03nifty_col.eps

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IW03sensex_col.eps

Sensex (18,762.8)

The Greek debt crisis that was threatening to send global equity markets in to a tail-spin moved out of the sick bay last week. This sent a wave of relief through global equity markets lifting stock prices higher. The Sensex too rallied to end the week 3 per cent up. Foreign institutional investors led the bargain-hunting brigade; pumping in over Rs 6,000 crore in to the secondary market in the last eight sessions.

There was a consensus among traders over the last three months that the market was heading lower and this outlook had prompted them to build short positions in the Nifty. The speed and magnitude of the pull-back has taken these players by surprise and the sharp reduction in open interest to below Rs 100,000 crore denotes that many were caught on the wrong foot last week.

We are once again ready to begin poring over quarterly earnings of companies and these numbers will influence sentiment in the week ahead. Progress of the monsoon will also be closely watched given IMD's revised forecast.

The persistent rally in the Sensex last week has taken it above both the 21- and 50-day moving averages. The index is however still below its 200-day moving average that is poised at 19,160. Oscillators in the daily chart have now moved deep in to the bullish territory. The weekly oscillators have not been similarly affected and they continue to feature in the neutral region, facing upward.

The inference from the oscillators is that though the short-term is gung-ho, the medium-term view has not turned bullish yet. The Sensex moved past the critical resistance at 18,267 that we had discussed in our last column. It even went past the next resistance at 18,857 on Friday though it ended the session below it.

The Sensex is in a broad sideways movement between 17,000 and 21,000 since last November. It is hard to predict the exact shape that such corrections take. That the index is appearing resilient around 17,000 is positive from a long-term perspective. But it is hard to trade the twists and turns in such corrections. Some guideposts for helping in negotiating the upcoming sessions are,

The area around 19,000 is a psychological resistance and the presence of the 200-DMA above it makes the entire zone between 18,850 and 19,200 a strong resistance in the near-term. Investors need to stay watchful as long as the index remains below this zone. But a strong move past will take the index to the key medium-term resistance around 19,800.

If the Sensex fails to move past the resistance zone between 18,850 and 19,200, or weakens at the outset of the week, it can decline to 18,440, 18,179 or 18,073. Short-term investors and traders can play long as long as the index holds above the first support, where the 50-DMA is also positioned.

The index needs to close below 18,000 to mar the short-term view and imply that it can head towards the recent trough at 17,314 again.

Nifty (5,672.2)

Nifty too thundered past the resistance at 5,481 indicated in our last column to move to the intra-week peak of 5,706 on Friday. The worst has been averted for the short-term with the firm move past 5,481. But since the index is in a sideways consolidation phase there are many possible counts at this point. The medium-term trajectory will become a little more obvious only after we observe the index' movement next week.

In the short-term, the index will face resistance in the zone between 5,650 and 5,750. Presence of the 200-DMA in this zone adds to the significance of this resistance. Traders holding long positions can book some profits if the index fails to get past this zone.

Reversal from here can drag the index down to 5,511, 5,425 and 5,391. Short-term traders can continue to buy in dips as long as the index trades above the first support. Since the 50-DMA is positioned at 5,521, 5,500 can serve as stop loss for traders.

However strong move past 5,750 will mean that Nifty is heading towards the resistance zone around 5,900. As explained before, this is a critical resistance from a medium-term perspective and it is hard to envisage a move past this level just yet.

Global Cues

The sentiment reversed in global equity markets last week with Greece initiating austerity measures to stave off debt default. US manufacturing expanding at a faster rate than expected also caused stocks in US to move higher to recoup a major chunk of the losses suffered since April. CBOE volatility index plunged below 20 to close near its long-term support at 15 reflecting this rise in confidence among investors.

European indices were at the forefront of this recovery and the DJ Euro STOXX 50 closed almost 6 per cent higher this week. The Dow and the S&P 500 made similarly strong moves. The Dow reversed from the intra-week low of 11,934 to close the week with 5 per cent gain. The index has also stormed past its short-term resistance at 12,500 implying that it can now attempt to storm the May peak of 12,876. Close below 11,800, where the 200 day moving average is positioned is needed to reverse the positive medium-term view for the index.

Asian markets too exulted in the resolution of the European crisis. Many Indices such as KLSE and Jakarta Composite closed at new record highs while the rest went on to close on a strong note. Indian and Chinese benchmarks were the only exception that turned a trifle jittery on Friday.

Reduction in risk-aversion made the dollar take a sharp plunge against other currencies. This helped crude oil and emerging market equities to move higher.

Published on July 08, 2011

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