Index Outlook: Bulls, fighting on the backfoot

Sensex (18,008.1)

It was a tightly fought battle in the narrow strip between 18,000 and 18,500 last week. The bulls can take heart from the fact that the 18,000-buttress is still intact. What is disconcerting is the sheer lack of conviction in up-moves. There was no dearth of negative news to keep stock prices on a leash such as the raging global food inflation, turmoil in Egypt, fear of political instability due to the arrest of the former telecom minister.

And then there were the ubiquitous twins — inflation and interest rates that continued to prey on the minds of market participants. The only silver lining was the strength in some of the other global markets. Our market could soon reach a point at which all the negatives are discounted in the prices so that it too can join the ongoing rally in developed markets.

Volumes were subdued in both the cash and derivative segment as investors preferred to watch the action from the sidelines. Open interest is also quite low at Rs 1.2 lakh crore. With the expiry of February series scheduled on the 24th of this month and the Union Budget announcement shortly after that, trading activity is likely to be muted this month.

Oscillators in the daily and weekly chart are in the oversold region denoting that the market is oversold from both short and medium-term perspective. A watch should be maintained on the monthly rate of change oscillator. This indicator is on the verge of declining to the negative territory after a prolonged negative divergence. Further deterioration in this indicator would be negative from a long-term perspective.

Despite the heightened emotions in market last week, the Sensex has not lost much ground. The index recorded the low of 17,926 on Friday. This is a key medium-term support level as it occurs at 61.8 per cent (Fibonacci) retracement of the up-move from 15,960 to 21,108. If a trough is formed here, the medium-term view will stay positive and the index can move higher towards its previous peak over the ensuing months.

As explained in our last column, the entire zone between 17,800 and 18,300 is a potent reversal area for the short-term. However trend following indicators are not giving any reversal signals yet. The viciousness of the fall on Friday also shows that there could be some more pain in the short-term. The index needs to close above 19,000 to mitigate the bearish short-term view.

A strong close below the 17,926 level indicated above will mean that the index is retracing the entire up-move from March 2009 low of 8,047 to the November peak of 21,108. Minimum targets in this case could be at 17,189, 16,754 or 16,118.

A bounce in the early part of the week can take the Sensex higher to 18,501, 18,729 or 18,821 next week. Failure to move beyond 18,500 will mean that the worst is not yet over. Downward targets for the index are 17,926, 17,700 and 17,180.

Nifty (5,395.7)

The Nifty declined to the low of 5400 on Tuesday and spent the rest of the week in the band between 5,400 and 5,550. The index is halting at the key medium-term support at 5,378. Medium-term view will turn negative only on a strong close below this level. Conversely a rebound from here can take the index towards its life-time peak again. The entire zone between 4,700 and 5,300 is a strong long-term support band since the index spent almost a year in this band.

Short-term resistances would be at 5,534, 5,585 and 5,635. Failure to move above the first resistance would mean that the short-term trend remains negative. The index would then be expected to decline to 5,368, 5,308 or 5,200 in the near-term.

Strong close below 5,378 will imply that the entire up-move from the March 2009 trough is being corrected. Minimum downward targets in that case would be 5,198, 5,071 and 4,886.

Global Cues

It was a relatively sedate week on equity markets and most benchmarks headed higher as concerns regarding Egypt abated.

European indices closed strongly higher. Many benchmarks such as the FTSE and DAX closed at new 52-week highs.

Even the DJ Euro STOXX 50 is close to the 2010 peak implying that a fresh long-term uptrend can resume in this index. CBOE volatility index declined from the intra-week peak of 19.9 to close at 15.9.

The Dow closed on a very strong note above the 12,000 mark last week. Near-term trend will stay positive as long as this index trades above 11,450.

Our medium-term targets stay at 12,444 or 12,896 as the index heads higher.

If we assume that third wave from March 2009 low is unfolding currently, minimum target would be 12,573.

Many Asian markets such as Shanghai Composite Index, Taiwan Weighted Index, Thailand SET, Jakarta Composite and the Nikkei recovered from lower levels to close on a positive note.

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