Investors disappointed by Act I of the Fed taper drama in December — when the financial markets reacted insipidly to the announcement — would have been pleased this time around. Funds are fleeing emerging markets; currency markets are in a state of pandemonium and even investors in developed equity markets such as the US and Europe are wondering if the party is over.

There was no dearth of drama in Indian markets either. Stock prices caved in on Monday morning, pulling both the Sensex and the Nifty below critical support levels. The RBI provided no relief by choosing to hike the repo rate. The Federal Reserve’s callous indifference to the plight of emerging markets in its policy statement exacerbated the decline that started on Monday.

The week ahead is going to be, as the Chinese put it, just as interesting. Inflation in the Euro Zone at 0.7 per cent in January has brought back fears of deflation in that region and expectations are high that the European Central Bank could cut its policy rate in the meeting scheduled this week. That can strengthen the dollar further, leading to rupee weakness. That does not bode well for our stock market.

FII outflow has accelerated from both equity and debt ever since the emerging market contagion began. There has been net outflow of $1.5 billion from equity and debt so far this year.

According to EPFR, a global fund-tracker, emerging market equity funds have lost $6.3 billion in the week ending on January 29, the biggest weekly outflow since August 2011. Oscillators in the daily chart of both the Sensex and the Nifty have plunged deep into the negative zone following the sell-off witnessed last week. The point of worry, however, is the sell signals in the medium-term charts. This is negative for the medium-term view.

Sensex (20,513.8)

We had expected short-term weakness, but the ferocity of the sell-off was quite unexpected. The Sensex has breached our farthermost short-term target last week. It has also closed below the recent low at 20,625, emphasising that the short-term trend has reversed lower.

The week ahead: We had a hammer and a star pattern in the daily candlestick chart. This implies indecision. A rally in the early part of next week will face resistance at 20,744, 20,911 and 21,000.

Inability to move beyond 20,911 will imply that the index can head lower in the upcoming sessions. Downward targets are 20,272, 20,087 and 19,973.

Investors can now look out for the support around the 200-day moving average positioned at 20,000. This is also a key medium term support for the index.

The short-term view will remain negative as long as the index trades below 21,000,

Medium term view: As explained in our last column, the Sensex is moving in a sideways range since November 2013. The decline last week is pulling the index towards the lower end of this sideways trend. But the range has not been breached and investors need not worry about the medium-term trend yet.

The alarm bells for medium-term investors need to be set off if the index records a strong close below 20,000. This is where the 200-DMA and a key Fibonacci support are placed. Subsequent targets are 19,500 and 19,000. If the Sensex continues vacillating in the zone between 20,000 and 21,500, it will retain the possibility of a new high this year.

Nifty (6,089.5)

The short-term trend in the Nifty too is down. The floor of the gap formed last Monday, at 6188, will be an important resistance for the Nifty in the week ahead. The 50-day moving average at 6,220, can also thwart rallies in the short term.

The week ahead: There can be a short-term bounce to 6,154 or 6,200 in the coming sessions. Inability to get past 6,200 will be the cue for short-term traders to initiate fresh short positions. Downward targets are 6,008 and 5,954. Short-term trend will turn positive only on a strong close above 6,234.

Medium-term trend: The medium-term trend in the Nifty is sideways since the November-peak of 6,342.9. Last week’s decline can make the index head towards the lower end of this medium-term trading range that is held aloft by a cluster of important supports at 5,973 (November 2013-trough), 5,971 (200-DMA) and 5,920 (38.2 per cent retracement of the previous medium-term up-move).

Investors, therefore, need not fret as long as the Nifty holds above 5,920. Continued movement in the band between 5,900 and 6,400 for few more months will be construed as positive from a long-term perspective. That said, decline below 5,900 can drag the index to 5,770 or even 5,618.

Global cues

Most global indices ended the week on a negative note. The CBOE VIX spiked to 19 before closing the week at 18.4. The medium-term view for this index will however be hurt only on a strong close above 23. The Dow Jones Industrial Average moved further lower last week. It has lost 5 per cent since the beginning of this year. The index is however still above the 15,703-support indicated last week. Next support is at 15,445. The short-term view will turn negative only if the Dow goes on to close below this level. Key medium-term support is at 14,700.