Sensex (18,268.4)

In a week devoid of any major economic or corporate news, fasts by various factions and government's fuddled response to these kept market participants riveted. Rumours that the UPA government might lose support of its regional ally, DMK, also caused some nervousness mid-week. Lethargic movement in global equities did not help the situation and Sensex sauntered with a negative bias and finally closed 100 points lower.

Onset of monsoon has not brought any relief to market so far. Headline inflation number and RBI's monetary policy meeting scheduled next week could decide near-term stock price movement. On the global front, the sound bytes coming out of Federal Reserve are being closely monitored to see what it is likely to do once QE2 ends on June 30.

That the developed markets appear to have begun a fresh medium-term downtrend is going to be a constraining factor for our market in the days ahead.

Sensex moved to the intra-week high of 18,545 on Wednesday but seemed to lack the will to move any higher and collapsed to 18,182 instead.

Traders and investors appeared quite disinterested in the proceedings and this was reflected in sub-par volumes. FIIs were net sellers for the week and FII volumes were also quite low. Open interest is climbing higher to around Rs 1,26,000 crore though it is still much lower than the high of Rs 2 lakh crore recorded before the November 2010 crash.

Movement of the Sensex last week has not altered our medium- or short-term view since the index was confined within the same range as the previous week. This sideways move has, however, resulted in loss of momentum and the 10-week rate of change oscillator has dipped in to the negative zone.

The 14-week relative strength index is also doing likewise. This means that the medium-term trend is under threat. Both daily and monthly oscillators are also on the verge of entering the bearish territory.

The medium-term trend in the Sensex is currently down and a strong close above 19,037 is required to salvage this view.

Inability to move beyond 18,700 will keep open the possibility of the index declining to 17,420 or 16,647 in the weeks ahead.

For the short-term, the index is currently in a sideways range and the trajectories that it can take are numerous in such situations.

Some guide-posts for the short-term are as follows,

Key near-term support is at 18,124. If Sensex holds above this level, it can move higher to 18,500, 18,672 or 18,730 over the ensuing sessions.

Move below 18,124 will mean that the index is heading towards 17,786. A bounce from this level will re-establish the short-term range between 17,800 and 18,600.

However, a crash that leads to penetration of 17,786 support will bring the medium-term targets given above to play.

If we consider the action of the oscillators and rest of global markets, the second scenario seems more likely, that is, Sensex is likely to slide lower to the support at 17,800.

Whether the bulls will be able to get their act together at that point and again manage a pull-back is to be seen.

Nifty (5,516.7)

Nifty recorded the peak of 5,570 before reversing lower to the intra-week low of 5,457. Key short-term support for the week is at 5,434. If the index moves below this level, it will decline to the trough of 5,328 formed on May 25. There is possibility of another rebound from this level and such a move will result in the index establishing the range between 5,330 and 5,600 over the ensuing weeks.

The downtrend will accelerate only on a move below 5,330 since that will result in the index moving further down to 5,224 or 4,989 over the medium term.

Conversely, if the Nifty manages to hold above the support at 5,434, it can move on to 5,628 or 5,734 over the ensuing sessions.

The medium-term trend in the index continues to be down and a strong close above 5,708 is needed to reverse this view. On the other hand, inability to move beyond 5,600 in the sessions ahead would exacerbate the downtrend dragging the index to 5,224 or lower.

Global Cues

Worries on economic growth being slower than anticipated caused a slide in global stock prices last week. Euro weakened following ECB's indication that it is not going to hike interest rate. This made dollar rally against other currencies. The sharp reversal in the dollar index from the low of 73.5 resulted in a sharp turmoil in other asset classes denominated in dollars.

However, the trend in the greenback remains weak and the index is likely to face stiff resistance from the zone around 76.5.

Another reversal from here will result in the index oscillating between 73 and 76 for few more weeks.

The Dow went on to record the sixth consecutive weekly loss last week. It also closed below the psychologically important 12,000 level.

Though the short-term trend is definitely down, we stay with the view that the medium-term view will turn negative only on a close below 11,640. Unless this index manages to clamber atop 12,000 again early next week, it is likely to move lower to test the zone between 11,500 and 11,640 in the days ahead.

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