INDEX OUTLOOK: Stock market at cross-roads

Sensex (19,451.4)

The week started on an exuberant note as cheer from the cricket field spilled over to the stock market. The Sensex built on the gains recorded since the last week of March to move to the peak of 19,811 by Wednesday. The mood turned sombre thereafter as the spectre of European credit crisis reared its head with Portugal reporting in sick-bay. Crude oil prices soaring higher also caused some nervous profit-booking.

A short trading week lies ahead interspersed with holidays on Tuesday and Thursday. Quarterly earnings expectations will take centre-stage and influence stock price moves. Rupee that has moved to 44 against the dollar is also likely to be cynosure of all eyes. Any further strengthening will cause consternation among the exporter fraternity causing further upheaval in stock prices.

Volumes were subdued in the derivatives segment with traders appearing divided over the market's next move. Open interest too remains low around Rs 1,30,000 crore. Put call ratio in index options is however quite high implying that traders are more willing to take bets on the short side. FIIs supported stock prices while DIIs were net sellers in all the sessions.

Friday's down-move has helped the oscillators in the daily chart cool down considerably. Both the daily rate of change oscillator as well as the relative strength indicator are retreating from overbought areas. The gravestone doji on the weekly candlestick chart suggests a possible trend reversal. But we need confirmation from next week's move to ascertain this.

Oscillators in both the monthly and weekly charts have not been affected by the decline last week. The implication is that the short-term trend has reversed lower while the medium and long-term trends continue to be up. As explained last week, the Sensex faces key medium-term resistance in the zone between 19,650 and 19,840 and the rally that began on March 21 can terminate in this zone. If this is the end of the B wave of the correction from 21,108 peak, then the C wave down can take it down to 17,761 or 16,495 again.

But we will wait for a strong close below 19,000 before jumping to these dire conclusions. A reversal above 19,000 can result in the index moving above 20,000 towards its former peak again. But we stay with the view that the index will stay in a broad range for the rest of this year.

The trading next week could be lackadaisical as market participants take the foot off the pedal in a truncated week. The index could drift lower to 19,200 or 19,039 in the days ahead. Halt at either of these levels will result in the index moving in a range between 19,000 and 19,800 for few sessions.

On the higher side, the index will continue to face resistance at 19,840. If this level is surpassed, the index can move on to 20,200 and 20,660.

The Nifty (5,842) retreated from the intra-week high of 5,944 to close 16 points lower. As explained last week, the zone around 5,959 is key medium-term resistance for the index. If the rally from 5,348 is the B wave of a larger flat or triangle pattern, it can terminate around these levels and the next wave down can drag the index to 5,332 or 4,954 over the upcoming weeks.

However, we will wait for the index to record a close below 5,700 before assuming that the above scenario will unfold. If this correction halts at 5,765 or 5,716, it will mean that there can be another leg upward in the B wave that can take it close to its former life-time peak again.

The Nifty could drift lower to 5,765 or 5,716 in the days ahead. Halt at either of these levels can result in a sideways move between 5,700 and 5,950 for the short-term. Next support is at 5,575. Targets on a move above 5,950 are 6,070 and 6,180.

The global markets put up a more subdued show last week. CBOE VIX remained in a narrow range between 16.5 and 18.5. As indicated earlier, this index needs to close below 15 to signal the resumption of an unbridled bull-run.

The Dow recorded the intra-week peak of 12,450 and moved sideways thereafter. The index is currently poised at key medium-term resistance. Downward reversal from here can pull it down to 12,100 or 11,900 over the upcoming weeks. The rounding-top formation last week also does not augur well. The break-out target however stays at 13,132.

It was a mixed-bag for Asia but many indices managed to close the week on a strong note. Seoul Composite Index and Thailand's SET went on to record new highs for this calendar.

The dollar index dredged new lows and is currently testing the November low of 75.2. This sent gold spiking to $1,474 and Nymex crude futures to $113/barrel on Friday.

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