Portfolio

Index Outlook: Mood solemn on Budget-eve

| Updated on March 07, 2011 Published on February 26, 2011

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Sensex (17,700.9)

The Union Budget 2011 is finally here! But the air of anticipation and excitement that surrounds this event is completely missing this year. All hopes of a pre-budget rally was dashed by continued violence in Libya and the resultant spike in crude prices. The sell-off in global equity coupled with derivative expiry caused yet another capitulation on Thursday, dragging the Sensex 546 points lower.

If the tepid reaction of stock market to the Economic Survey and the Railway Budget is anything to go by, the Union Budget could also turn out to be a damp squib. But the current mood in the market is so glum that even a tiny surprise can help stock prices bounce.

FIIs were on the back-foot through the week and they pulled out Rs 2,700 crore on Thursday alone. Derivative turnover reached a crescendo on that day as February derivative contracts expired. Open interest at less that Rs 1, 00,000 crore augurs well for the market since lower leveraged positions could reduce volatility.

It was a disappointing show by the market last week and oscillators in the daily chart have once more retreated in to the negative zone. What's more worrying are the oscillators in the monthly chart. The 10-month rate of change oscillator is poised on the zero line but is declining from positive to negative zone. 14-month relative strength index at 53 also implies that these indicators are on the brink of signaling commencement of a protracted down-trend.

The medium-term trend in the Sensex is down. We can, however, draw heart from the fact that the Sensex is among the top three losers among major benchmarks this year, the fall being exacerbated by domestic scams and rate-hike fears. We have also pointed out that the Sensex has already retraced almost 30 per cent of the entire rally from March 2009 lows. A long-term correction that is shallow in nature can stop anywhere between 17,200 and 16,200 and the Sensex can then spend a year or more in a sideways band between 16,000 and 21,000.

So a budget that pleases can help trigger a rally from these levels that can take the Sensex higher to 18,800 or even 19,600 over the medium-term.

On the other hand, a budget that irks will take the index towards the lower end of the band indicated above – to 16,330 or 16,118. Since the May 2010 trough at 15,960 is also present in the vicinity, the entire zone between 15,900 and 16,300 will be a strong support zone if prices cave in post-budget announcement. We will look at subsequent supports if the index draws close to this zone.

Budget day gyrations are almost impossible to map. Immediate supports for the index are at 17,524, 17,345 and 17,141. Decline will accelerate only once the index moves below the third target and the next halt could be at 16,592. Short-term resistance will be at 18,220 and 18,690.

Nifty (5,303.5)

The Nifty declined to the low of 5,233 before bouncing slightly higher on Friday. A peppy start to the budget session could take the Nifty higher to 5,373 or 5,460. Continued buoyancy will make the index reach the recent peak at 5,600.

As mentioned before, the zone between 5,600 and 5,650 is a key medium-term resistance for the Nifty and traders should watch out for downward reversal from this zone. As long as the index trades below this region, it will stay volatile. However close above 5,650 will give a fillip to the medium-term outlook paving the way for a rally to 5,760 or 5,900.

Short-term supports that traders can watch out for on budget day are at 5,251, 5,197 and 5,136. A knee-jerk reaction when the document is presented can cause a dip to either of these levels followed by a rebound. However, decline below 5,136 can mean that the Nifty can head towards the long-term support zone between 4,786 and 4,886. The May 2010 trough is present here and it also occurs at 38.2 per cent retracement of the rally from March 2009 lows. It is hard to envisage a decline below these levels even if the going gets very rough post-budget.

Global Cues

Last week is notable for the sharp declines in European and American indices that were tripping merrily higher since the beginning of this calendar. An evening star candlestick pattern is seen in indices such as the CAC, DAX, FTSE and the Dow. This is a reversal pattern that can usher in few more weeks of correction.

Other indices that were already in a medium-term decline since November also joined in last week's sell-off. CBOE Volatility index spiked higher to the intra week high of 23.2 before closing at 19.2. Inability to move below 15 denotes that investors are not entirely convinced about the sustainability of the ongoing rally in developed markets.

The Dow did not make any headway last week and declined to the low of 11,983. As indicated last week, this index needs to close below 11,800 to signal the beginning of a serious medium-term correction. Else, it can continue to trudge higher.

Nymex Light Crude futures reached the high of $103.4 last week. Simple extrapolation of the move from January 2009 lows gives us the targets of $98 and $119. We also need to remember the strong resistance around $103 that occurs around the 61.8 per cent Fibonacci retracement of the decline from the July 2008 peak. Strong close above this level can be followed by an unbridled rally in crude prices.

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Published on February 26, 2011
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