Index Outlook: Negotiating a rough terrain

Sensex (17,878.8)

Pandemonium ruled in financial markets early last week as Nikkei dived 20 per cent in two sessions, and most asset classes followed suit as a wave of risk aversion gripped investors. Nikkei's rebound on Wednesday coupled with Yen recovering from the low of 77 against the dollar helped in assuaging sentiments to some extent.

Indian market, however, seemed to be operating on a different plane. It went up when the world was collapsing on Monday and then turned tail on Friday when global equities surged. The weekly decline in the Sensex was also much milder than the cuts received by other global benchmarks. It is to be seen if our market is able to carry on in this vein given the fact that most issues – possibility of a nuclear disaster, rising crude prices, government grappling with corruption charges et al still remain unresolved.

Volumes in both cash and derivative segment were low last week as traders, shaken by the ongoing events withdrew to the sidelines. Open interest at around Rs 1,40,000 crore also reflects a cautious stance. FIIs who had been supportive through the month of March, turned net sellers in the last two sessions.

The Sensex did not do much last week and remained in a narrow band between 17,800 and 18,500. This leaves the trend along all time-frames unaltered — long-term trend is up, medium-term trend is down and short-term trend is sideways.

Friday's sell-off dragged the daily oscillators in to the bearish zone implying that the decline can prolong in the week ahead. Weekly oscillators are, however, moving sideways in a benign fashion. The 10-month rate of change oscillator attempting to take support at the zero line gives some hope of the index hitting a bottom in the vicinity.

The key here is deciphering the sideways move that is on since February 11. Trend following methods would suggest that this is a pause before the index declines to the next long-term support zone between 16,000 and 16,300.

But the pattern of the decline from 18,737 suggests that the index has not launched in to an impulse wave downward yet. This sideways move can turn out to be a terminal corrective or a base building effort that can be followed by a rebound to higher levels, aided by short-covering.

A similar situation though on a larger time-frame occurred between October 2008 and March 2009 when the index moved sideways but with higher troughs and finally reversed higher. That the index has already retraced almost 30 per cent of the entire rally from March 2009 lows also supports this possibility.

If we look at the downward targets of the move from 21,108, this wave can complete in the band between 17,243 and 17,800. If this zone does not hold, decline to 16,343 or 16,118 becomes possible. Medium term risk will be mitigated only on close above 18,750.

The weak close on Friday has made the short-term view negative. A negative start will drag the index down to 17,470, 17,295 or 17, 243. Investors can watch out for rebound from any of these levels. Subsequent target is at 16,758. Resistances for the week would be at 18,200, 18,400 and 18,736. Failure to move above the first resistance will mean that the index will slide lower in the ensuing sessions.

Nifty (5,373.7)

The Nifty too did not move much in either direction and moved within 5,350 and 5,550. Key short-term support for the index is at 5,376 and the Nifty is poised just above this level though it dipped slightly below on Friday. A rebound on Monday can take the index to 5,458 or 5,515. Reversal from either of these levels will be the cue for initiating fresh short positions with targets of 5,376, 5,232 and 5,165. The down-move is likely to accelerate only on a strong breach of 5,330.

As explained above under Sensex, the medium-trend is sideways but it is difficult to decipher if this is the last part of the down move from 6,338 or the halt before the index declines to the next support zone between 4,700 and 4,900. Strong weekly close above 5,650 will mitigate the bearish medium term outlook.

Global Cues

Most global benchmarks took a sharp cut in the first half of the week but rebounded in the later half. Decline was very sharp in European indices such as the CAC and DAX that closed between 3 to 5 per cent lower. VIX spiked to 31.3, the highest level recorded since last July. Key resistance for this index is at 35.5. Close above this level is needed to signal the beginning of a prolonged turbulent period for global equity market.

The Dow too recorded the low of 11,555 on Wednesday before closing above the 11,800 mark.

This index appears more resilient when compared with its developed market counterparts. We stay with the view that a close below 11,258 is required to make the medium-term trend negative. Short-term support is moved lower to 11,500.

Close below this level will mean that the short-term trend has reversed lower.

The sharp move down to the low of 8,228 in Nikkei means that the index has charted the third wave from the April 2010-peak last week. In other words, the index is in a sideways consolidation in the form of a flat wave since then and the C of this formation could have completed last week.

Close below 8,750 is required to signal the resumption of the long-term downtrend. It is however quite likely that the index spends the rest of this calendar in the range between 8,700 and 11,400.

Some indices such as Russia's RTSI Index, Kospi and Turkey's benchmark managed to close the week in the green.

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