Index outlook: To fight or to flight?

The week began on a wobbly note with the Sensex diving below the 16,000 level on Monday as investors fretted over weak industrial production numbers. The downward spiral in the rupee dampened sentiment further.

The RBI's inaction in the monetary policy proved to be the final straw and stock prices caved in on Friday. Weak advance tax numbers reported by some companies was also cited as the reason for pulling their stock prices lower. Eurozone watching abated and this trend is likely to continue as the holiday season kicks off overseas.

Movement of rupee will be closely watched in the days ahead due to the impact it has on FII flows. Dollar returns are lower by 15 per cent when compared with returns of domestic investors due to the rupee depreciation this year. These outflows could accelerate if the Indian currency continues plunging lower.

Volumes spiked in the last two sessions as volatility picked up. Derivative volume soared to Rs 1,80,000 crore on Friday, the highest this month. Open interest, however, remained low around Rs 1,20,000 crore. Index put-call ratio based on volume has declined below 1 implying that the market is getting oversold.

Oscillators in the daily chart turned negative after last week's fall. Rate of change oscillator moved deep in to the negative zone and the 14-day relative strength index declined to the oversold zone at 35. Oscillators in the weekly chart are however moving sideways denoting that not much has changed over the past few weeks. The monthly rate of change oscillator is also displaying positive divergence implying that the down move is losing momentum.

Sensex (15,491.3)

The 16,000 level could not withstand the bears' onslaught for even one session and the Sensex went on to close at 15,870 on Monday. It is obvious that the short-term trend has reversed lower as the index closed at its lowest point for the week. It recorded the low of 15,425 on Friday before closing just below the 15,500 mark. But as explained earlier, such feeble breaches are not to be taken too seriously and the action in the next session is to be seen before pressing the panic buttons.

If the Sensex continues moving lower next week, where can the next halt be? Next target of the down move from 17,908 peak is at 14,573. If we expand the picture and assume that the third wave down from the 21,108 peak is currently in motion, we get the first target in the vicinity at 14,593.

The 50-per cent retracement of the up-move from 8,047 to 21,108 throws up the level of 14,577. This convergence of counts means that the index could at least halt in the zone between 14,500 and 14,600 if it continues trudging lower.

The short-term supports are at 15,391, 15,308 and 14,837. If these levels are breached then the medium-term supports cited above will come in to force. Resistances for the week will be at 16,027, 16,400 and 17,003. Inability to move beyond the first resistance will imply impending weakness in the upcoming sessions.

Nifty (4,651.6)

The Nifty too closed the week below the 4,700 level much to the consternation of the market participants. But as we have been reiterating, the index is in a broad range between 4,600 and 5,400 over the last four months. The floor of this range has not been breached emphatically yet.

Let us consider where the index' next halt can be? Extrapolation of the down-move from the 5,400 peak gives us the targets of 4,630 and then 4,339. First target of the down-move that began from 6,338 gets us 4,400. If we consider plain vanilla Fibonacci retracement targets, 50-per cent retracement of the rally from 2,539 is at 4,438. In other words, the area between 4,350 and 4,450 should be closely watched as a potential support zone, if the slide continues over the upcoming weeks.

For the week ahead, investors need to bear in mind that the index is at important support level around 4,600. A bounce is possible from here that takes the Nifty to 4,807, 4,887 or 4,920. Traders can initiate fresh shorts on inability to move above the first target.

Conversely, the short-term view will turn less dire on move above the third. Downward targets on move below 4,600 are 4,589 and 4,538.

Global Cues

The year-end mood is already setting in the global stock market. Most benchmarks moved sideways with a negative bias over the week finally ending just a tad lower. That investors were less edgy is also reflected in the CBOE volatility index moving lower to close at 24.3. As we have been reiterating, this index has key support at 28 and a close below this level indicates that investor sentiment, particularly in the US, is tilting towards optimism.

That is not surprising given that the Dow is trading 2 per cent higher than the level recorded towards the end of last year. It is also trading around 14 per cent higher from the low of 10,404 recorded in October this year. Both the medium as well as the short term trend in the Dow are currently up. The index needs to move below 11,600 to make the near-term view negative. Medium-term view will reverse on a close below 11,100.

If the short-term support holds in Dow, it can move higher to 12,200 or 12,600 in the upcoming weeks. Perhaps Santa Claus will make an appearance in the week ahead.

Interestingly, most Asian indices such as the Hang Seng, KLSE Composite, Jakarta Composite Index, Philippines Composite, Seoul Composite and Thailand's SET are still in a medium-term uptrend, trading well above the lows recorded in October this year. Shanghai Composite is the other index besides the Sensex and the Nifty that is displaying weakness.

The strength in dollar sent both crude as well as gold tumbling last week. Gold fell to $1,597. Key long-term supports in the vicinity are at Rs 1,548 and then at Rs 1,450. The week ahead should tell us whether the long-term trend in this metal is really under threat. A rebound from these supports will imply that gold will consolidate sideways for few more months before heading higher.

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