Index Outlook: Shackled in a trading range

Sensex (18,174.1)

It was an apocalyptic scene that unfolded before our eyes on Friday as live cameras caught the wall of sea water moving in to Japan, wreaking devastation, the economic impact of which is yet to unfold. But investors' confidence in Japan to rebuild itself is aptly reflected in the modest 1.7 per cent decline in Nikkei on Friday. Other global markets too took the catastrophe in their stride with Dow Jones and S&P 500 ending the day in the green.

The week started on an edgy note for the equity markets due to the shenanigans of our ruling party and its allies. Robust exports and slowing food inflation lent some cheer to an otherwise sombre mood weighed down by high crude oil prices and continuing violence in Libya. The WPI number due in the early part of the week and the RBI's monetary policy meeting on Thursday will influence stock price movement next week.

FIIs were seen buying in some sessions and selling in others. But they have net purchased $400 million this month. Volumes were subdued in both the cash and derivative segment as investors appeared undecided regarding the market direction in near term. Open interest at Rs 1,25,000 crore denotes that traders are still not confident enough to increase positions.

Oscillators in the weekly chart continue to move sideways in the negative zone implying that the medium-term downtrend from November peak continues to hold sway. The 50-day moving average crossing below the 200-DMA is also a signal that the current downtrend can not be wished away just yet. On the daily time-frame however, the downtrend appears to be losing momentum.

The Sensex moved sideways with a bearish bias last week. As explained in our last column, the medium-term trend in the index is down. As long as it trades below 18,750, the possibility of a decline to 17,243, 16,600 or 16,300 remain open. Strong rally above 18,750 will mitigate this negative view and take the index higher to 19,200 or 19,650.

With many of the other global indices too beginning a down-trend, it is hard to envisage a run-away rally to the previous peak in the ensuing months. But the positive for our market is that the correction in our market began much earlier than the others and the magnitude is also much larger than others.

Simple retracement of the entire up-move from March 2009 low to the November peak gives us medium term targets at 17,189, 16,758 and 16,118. In other words, we could be closer to the bottom than the rest.

Short-term trend in the Sensex is ambivalent. The index is yet to breach the key short-term support at Rs 17,952. Reversal above this zone can pull the index to 18,735 or 18,846. The presence of the 200-DMA at the second target would ensure that the index finds it a tough struggle to get past it. Subsequent target is 19,200. Breach of the 17,952 support on the other hand will pull the index down to 17,800, 17,470 and 17,295.  

Nifty (5,445.4)

The Nifty recorded the peak of 5,563 before giving up the gains to close at 5,445. The index is halting just above the key support at 5,419 and fresh short positions are recommended only on a strong move below this level. Subsequent targets for the index would be 5,335, 5,233 and 5,178.

If the index bounces from current level, it can move on to 5,600 and then to 5,670 where the 200-DMA is positioned. The strong resistance in the zone between 5,600 and 5,700 can prove to be hard to surpass just yet. But if the index manages that feat, next target is 5,716.

We stay with the view that the medium-term view stays under a cloud as long as the index trades below 5,621. Unless the index manages a strong move beyond this level, there will remain open the possibility of decline to 5,165, 4,970 and 4,891.

Retracement targets of the upmove from March 2009 low for Nifty are 5,198, 5,084 and 4,886.

Global Cues

Global equities underwent a turbulent time last week with many benchmarks recording steep declines. European indices such as the FTSE, CAC and DAX closed over 3 per cent lower extending the downtrend that is in place over the past month. The VIX spiked to 22.2 on Thursday before closing at 20 implying that investors are getting a trifle jittery.

The Dow recorded the low of 11,936 on Friday but ended the week above the 12,000 level. As explained before, a close below 11,800 is required to make the short-term view negative. The medium-term uptrend will be under threat only if the index closes below 11,258; that is the peak formed on April 2010.

Many of the agri-commodities such as cocoa, wheat, corn, bean-oil and so on recorded sharp declines last week ending a multi-week uptrend that has taken them to record highs. Gold recorded the peak of $1,444 before ending at $1,417. Short-term supports for the precious metal are at $1,396 and $1,364. If the metal holds above the first support, it will indicate a propensity to head higher in the upcoming sessions.

NYMEX Light crude futures are closed the week in the negative after attempting to get past the resistance at $105. The movement next week should help us understand if this is a serious reversal or just a mild consolidation.

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