Index Outlook: Stocks stride with Dhoni's men

Sensex (19,420.4)

There was a certain zing to the stock market performance last week probably due to the Indian cricket team's exhilarating run in the World Cup. The trading fraternity seems to have used the optimism drawn from the cricket field to drive up stock prices. Bear squeeze and enthusiastic buying by FIIs also helped the Sensex close 600 points higher.

Volumes were subdued through the week though they spiked on the expiry day. Derivative volume crossed Rs 2,50,000 crore on Thursday. Notwithstanding some sharp intraday swings, the derivative expiry passed peacefully. Open interest however remains quite high, around Rs 1,50,000 crore, implying that many traders have rolled over their positions, which are predominantly on the short side.

Foreign institutional investors were net buyers through the week. They have net purchased Rs 8,400 crore worth of stocks in March. Surprisingly, the DIIs were selling in the recent sessions.

Instead of gazing at technical charts this week it might be wiser to watch the India-Sri Lanka final to be played on Saturday. Recent report published by Mishra and Smith (2010) show that while an Indian win in cricket ODIs has no impact on stock prices, a loss will result in stock prices moving down, especially if Sachin Tendulkar features in the game.

Levity aside, this state of amnesia cannot last too long and investors are bound to awake to the risks posed by high crude oil prices and ongoing geopolitical unrest soon. Fourth quarter earnings of Indian companies would also determine the trajectory of the stock market in April.

The morning star candlestick pattern in the monthly Sensex chart is a positive signal for the long-term health of the market, though the movement next week has to be seen to confirm this. The 10-week rate of change oscillator moving above zero line also denotes a possible trend reversal. But again we need confirmation from next week's move before concluding that the worst is over.

There was no stopping the Sensex last week as it breached the near-term resistance between 18,950 and 19,060 to hit an intra-week peak of 19,562. The speed of the move is very heartening. But it is a little early to assume that the long-term uptrend has resumed and the index is going to soar above 21,000 just yet.

While that is possible, there is a higher likelihood of this move being the second leg of the correction that began in November 2007. Under this scenario, the up-move can terminate either in the zone between 19,650 and 19,840 or a little above that. Another decline to 17,000 or below can then follow as the long-term correction progresses. In simple terms, the Sensex will move in a range between 17,000 and 21,000 (upper boundary is being raised slightly) for the rest of this calendar.

One positive takeaway from last week's move is that it diminishes the prospect of a decline to 16,000 in the near future.

A buoyant opening on Monday morning can take the Sensex to the near-term targets of 19,650 or 19,840. Target on a close above 20,000 is 20,665. Investors ought to stay a little watchful as long as the index trades below 20,000. Reversal from here can pull it down to 18,900 or 19,000. The 200-DMA at this level will now provide support to the Sensex. Short-term view will turn negative only on close below 18,468.

Finally, as explained above, market performance in the short-term is dependant on the performance of the men in blue. Go for it India!!

Nifty (5,826)

The Nifty too breached the critical resistance around 5,700 easily in the early part of the week and went on to record the intra-week peak of 5,872. Short-term resistance for the index lies at 5,894 and 5,959. Traders should exercise some caution as long as the index trades below these levels. The zone around 6,000 will also act as a strong psychological resistance for the index.

A reversal from this zone can pull the index lower to 5,674 or 5,550 in the near-term. Traders can play long as long as the index trades above the first support. The short-term view will turn negative only on a close below the second support.

Conversely, target on a close above 6,000 is 6,178.

It is, however, too early to discern the medium-term trend in the index. Strong move above Rs 6,000 will re-open the possibility of a re-test of the previous peak at 6,338. The medium-term trend will however be classified as sideways in this case and the index can fluctuate between 5,200 and 6,338 for the rest of the calendar.

Global Cues

Most global indices made further gains last week. A strong US jobs data released on Friday that showed that US economy created 216,000 jobs in March helped sentiments further. CBOE volatility index that spiked to 19.8 on Tuesday and closed the week on a two-month low reflecting the fact that investors have shaken off the recent blues and are beginning to feel optimistic again.

It was a swinging week for the Dow Jones Industrial Average as it erased all the losses made since February to re-attain the peak at 12,389. The index could face some resistance at current levels and reversal from here can drag it down to 11,500 again. However target on a strong close above 12,400 remains at 13,132.

Many of the Asian benchmarks such as the Jakarta Composite Index, Straits Times Index, Thailand's SET also recorded strong gains last week. Commodities especially agri-commodities wiped out the recent losses to record new highs again. Nymex crude futures have moved emphatically above the resistance at $104. As indicated earlier, next target for this contract is between $118 and $120.

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