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It was time for reckoning for the global stock markets last week. After the heady rally that had taken benchmarks of many developed markets to life-time highs, global equities were yanked back sharply on Thursday.
The epicentre of this turbulence was Japan where the Nikkei closed over 7 per cent lower in that session.
Japanese investors can, however, stay sanguine as despite this fall the Nikkei is up 77 per cent since its 2012 low. But the reason for the sell-off – Japanese Government Bond yield rising to almost 1 per cent —poses a serious concern.
Higher yields mean higher borrowing costs for Japanese investors and higher cost of servicing the Government debt.
This has the potential to derail the recovery in Japanese economy. Rising yields also mean that bond investors are worried about rising inflation and long-term prospects of the Japanese economy.
The ostensible reason for the spike in JGB yields was rather flimsy - Federal Reserve Chairman Ben Bernanke’s statement that the quantitative easing could be slowed if the US economy shows signs of picking up.
The exaggerated reaction to this statement reflects the state of investors’ nerves given the steep rise in equity prices even as worries on the economic front continues.
Indian markets were edgy right from the outset of the week. The Sensex and the Nifty retreated from multi-year highs recorded on Monday to close around 3 per cent lower. Contraction in Chinese manufacturing and weak earnings of some of the market bellwether stocks further soured sentiment.
Volumes were nothing to write home about. Open interest on NSE’s derivative segment has crossed Rs 1,70,000 crore as both the bulls and bears believe that they have a chance to make big money at this point. FIIs continued to be net buyers through the turbulence.
The decline last week has resulted in an evening star formation in the weekly chart of the Sensex. But we cannot conclude that this is a reversal since the formation next week needs to confirm this pattern.
Oscillators in the daily chart have plunged into the negative zone and are signalling a sell, in tandem with the reversal in prices.
Weekly momentum oscillators are also beginning to show signs of nervousness, dipping slightly.
Sensex (19,704.3)
The deep cut last week could be worrying some investors. But from a technical perspective, the short-term trend in the index has not reversed lower yet. The fall in fact halted at key short-term support at 19,576.
It is possible that the index reverses from here and goes on to 20,443, 20,664 or 20,934 in the weeks ahead.
Investors need not unduly worry about the short-term trend as long as the Sensex trades above 19,040. This level needs to be breached to signal a halt in the ongoing party.
As far as the medium-term trend in the index goes, we have been reiterating the presence of a cluster of key resistances between 20,000 and 21,000 and the possibility of a decline from these levels.
But the medium-term trend is not under threat as long as the index holds above 18,000.
It is possible that this decline continues to take the index down to the support zone between 17,500 and 18,500 before a rebound.
Movement between 18,000 and 21,000 will be construed as a base-building effort by the index and positive from a long-term perspective.
Nifty (5,983.5)
The Nifty too declined to an important short-term support level last week at 5,941.
The halt at 5,936 that is close to this support implies that the short-term trend in the index continues to be up. Reversal from this support can take the index higher to 6,229, 6,338 or 6,401 in the week ahead.
Short term trend in the index will not be under threat as long as it trades above 5,763.
Short-term investors can therefore continue to buy in declines with stop-loss at 5,750. The medium-term trend in the Nifty continues to be up as the uptrend that began from the trough at 4,770 continues to be in force.
But the index is reversing lower from critical resistance zone.
This implies that the correction can extend to 5,660 or 5,500 or even 5,330. A sideways move between 5,500 and 6,300 for few months will be construed as positive from a long-term positive.
The index needs to close below 5,330 to make the long-term outlook negative.
Global cues
Most global benchmarks closed lower last week, throwing a question mark over the sustainability of the ongoing rally.
CBOE volatility index spiked to intra-week peak of 15.1 before closing at 13.9 as traders started worrying about a sharp decline in prices.
The Dow hit the intra-week peak of 15,542 before beginning its slide. The doji in the weekly chart, while not overtly negative, denotes indecision. Short-term trend will turn negative only on a close below 14,860.
The index needs to close below 14,371 to signal a reversal in the medium-term trend.
Since the index has already achieved its first medium-term target at 15,400, it needs to hold above 14,371 to signal the intent to move on to the next target at 15,677.
The Nikkei held everyone spell-bound last week with its gyrations. As explained earlier, break above the long-term resistance at 14,000 is a positive for the index. The index went on to the high of 15,942 last week and reversed sharply.
The fall has, however, halted just above the 14,000 mark implying that the medium-term view has not reversed lower yet. The level that medium-term investors need to watch out for is at 13,000.
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