Index Outlook: Watchful beginning

It is not the best of beginnings for the stock market this year. The Sensex ended the week 342 points lower while the Nifty lost 103 points. If you belong to the superstitious section of investors, this does not portend well for the prospects of equity for the rest of 2014.

In the past five years — 2009 to 2013 — the first few days of January have quite accurately mirrored how the rest of the year would turn out to be.

Investors appeared edgy at the beginning of the week. Fear of the government over-shooting its fiscal deficit target, weak core sector growth in November and contraction in Purchasing Manager’s Index for December dampened sentiment. The Prime Minister’s press conference on Friday did nothing to alleviate the mood and the indices slumped further in that session.

In the absence of any significant news flow next week, markets could tread water, awaiting a slew of third quarter earnings announcement that will start flowing in from the next weekend. FII flows will be keenly watched to see if the tapering of bond purchase by the US Federal Reserve has any material impact on these flows.

Cash volumes were moderate while derivative volumes were significantly lower. FIIs were seen nibbling at both stocks and debt last week. Index put-call ratio declining below 1 indicates that market remains overbought at these levels.

Oscillators in the daily chart are in the neutral zone but the negative divergence in the rate of change oscillator and relative strength index imply that there is no momentum in the short term. Weekly price rate of change oscillator dipping in the negative is worrying because it means that the medium-term trend is under threat. We will, however, need to see how this oscillator behaves next week to confirm this trend.

There is a bearish engulfing candlestick in the weekly chart of the Sensex and the Nifty that is negative from a short-term perspective. That both the indices are poised just above the 50-day moving averages also means that they are at a critical point from a medium-term standpoint.

Sensex (20,851.3)

The short-term trend has reversed lower since the peak of 21,304. Continuation of this trend can take the index lower to 20,568; 20,039 or 19,959 in the near term. Key support zone for the short term is around 20,000. Investors can continue to buy during declines as long as the index holds above this level.

It is only on a break of this support that the next targets at 19,500 and 19,000 will come into play.

Short-term resistances are at 21,116 and 21,331. Inability to move above the first resistance will mean that the index will move lower in the near-term.

Nifty (6,211.1)

The Nifty too, is in a short-term downtrend since the peak of 6,415. Continuation of this downtrend can take the index lower to 6,130; 6,072 and 5,964.

It needs to be noted that the index is currently poised just above its 50-day moving average.

A bounce from these levels can take the index to 6,288 or 6,360. Inability to move above the first resistance will be the cue for short-term traders to initiate fresh short positions.

Key short-term support for the index is at 5,922.

Fibonacci support as well as the presence of the 200-day moving average at this level, lends credence.

Short-term investors can buy during declines as long as the index trades above this level.

Subsequent supports are 5,770 and 5,617.

Global cues

It was a quiet start to 2014 for most global markets. Stock trading was marked by low volumes with many market participants still away for the New Year break.

European markets closed slightly lower while many Asian markets were closed during the later part of the week for New Year.

The US markets witnessed a mild sell-off on Thursday and Friday making the CBOE volatility index close around 10 per cent higher for the week.

The VIX however, continues to trade in the 10-15 band that denotes a very positive sentiment in the market.

The Dow hit the intra-week high of 16,588 before ending the week down 8 points.

We stay with the view that the index needs to close below 16,174 to make the short-term view negative.

The medium-term trend in the index will turn negative only on close below 14,700. Medium-term targets for the current upmove are 16,616 and then 17,790.

The US 10-year treasury note prices declining to 2011 level of 123 does not bode well for asset classes, such as gold and emerging market equity. These notes are poised at critical Fibonacci support. Any further decline will take them to 121 or 118.

> lokeshwarri.sk@thehindu.co.in

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