Index Outlook: Hovering on the brink

Sensex (19,135.9)

The wind is changing again. Global investors appeared more enamoured with developed market equity last week even as they turned wary on emerging economies grappling with inflationary pressure. The Sensex was among the worst performers in sharp contrast to the Dow and the DAX that closed at multi-year highs.

The twin spectres of inflation and interest rate hike spooked investors last week sending stock prices scurrying lower. Expiry of April derivative contracts also contributed to the volatility as traders unwound long positions and built in expectation of a sustained rally.

It could be a bumpy ride next week as well with the RBI's monetary policy due on Tuesday. FIIs have already turned cautious and were seen selling through last week. Traders too seem shaken by last week's decline. Derivatives in the May series have opened with very low open interest around Rs 1,10,000 crore.

The Sensex reversed from the intra-week high of 19,697 to close near the lower end of its short-term trading band at 19,000. The index also closed the week just above its 200-day moving average. Oscillators in the daily chart have deteriorated with the 10-day rate of change oscillators dipping deep in to the negative zone.

The 14-day relative strength index also moved below the neutral zone implying shaky outlook for the near-term. The weekly oscillators, however, are still in the bullish zone. The weekly chart of the Sensex shows that despite the wild intra-week gyrations, the index is actually moving in a sedate sideways range between 19,000 and 19,800 over the last three weeks.

That said the spinning-top candle in the monthly chart, that too around the crucial resistance at 19,800 does not bode well for the medium-term prospects of the index. It implies the possibility of the current rally being a pull-back or the B wave in a protracted correction. The C wave down can then pull the index lower to 17,761 or 16,493 over the ensuing months.

A strong close above 19,800 is required to mitigate this view. As explained earlier, the trading range for the index will then shift between 17,000 and 21,000.

The support around 19,000 will be closely watched next week. Presence of the 200-DMA at 19,135 adds to the significance of this zone. Close below 19,000 will mar the near-term view considerably. Decline to 18,700 or 18,563 will then be on the cards.

The Sensex could hover a little around the 19,000 support in the week ahead. A small rebound can take the index up to 19,274 or 19,435. Reversal from either of these levels would mean that the index is set to breach the 19,000-buttress. Conversely, short-term view will turn positive on a move above 19,435. Next target is 19,696.

Nifty (5,749.5)

The Nifty too is moving sideways in the range between 5,700 and 5,950 over the last three weeks. Inability to move above the key medium-term resistance at 5,960 spells trouble. If the C wave down from the 6,338 peak begins unfolding, it can drag the index down to 5,332 or even 4,954 over the ensuing months. A weekly close above 5,960 is needed to avert the risk of a sharp decline.

Near-term trend in the index is currently down but the index ended the week above the 200-DMA. It is also just above the key short-term support at 5,716. Close below this level can pull the Nifty lower to 5,616 or 5,575 in the days again.

A short-term rebound can take the index higher to 5,785 and then to 5,833. Traders can initiate fresh short positions on a failure to move above the first resistance. On the other hand, the short-term view will turn positive on a close above the second resistance.

Global Cues

It was a week in which stocks in the developed markets including Europe and the US raced higher while the emerging market group languished. European indices such as the CAC, DAX and FTSE closed the week with gains. CBOE volatility index moved in a narrow range above 14.4 reflecting the confidence among the trading fraternity.

The Dow surged to 12,832 last week aided by strong earnings from some of the larger companies. Next medium-term target for the index remains at 13,137. But as explained last week, simple target of the third wave from 6,469 low are 12,573 and 14,400. So if the index sustains above 12,500, it can head towards 14,400 in the months ahead.

The BRIC quartet put up a subdued show, all four markets closed in the red. The dollar index traded on ICE took another beating last week once it became clear at the FOMC policy meeting that interest rates are not likely to be increased anytime soon. This index appears headed toward the 2008 trough around 72.

Weakness in the dollar has sent gold traipsing to the new high of $1,569/oz. Immediate target for the yellow metal is $1,584. If this is surpassed, $1,707 will be possible.

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