Technical Analysis

INDEX OUTLOOK - The going gets tough . . .

LOKESHWARRI S.K. | Updated on August 27, 2011 Published on August 27, 2011



Sensex (15,848.8)

The Sensex started on a peppy note but lost its way mid-week. The bears who were chipping away at the index through the week managed to drag it below the 16,000 level on Friday, causing a deep gash in the market mood. Interestingly, global markets stabilised last week and most of the leading indices managed a positive weekly close. The shock at the capitulation on Friday afternoon apart, the Sensex has closed the week less than 2 per cent lower.

Market participants were mainly glued to global developments and the goings on in Ramlila Maidan, Delhi. Some of the volatility around mid-week can be blamed on the expiry of the August derivative contracts. But the decline appears to be perpetrated mainly by the overseas investors who continued to be net sellers through the week. According to BSE, these investors have pulled out close to Rs 17,400 crore from the secondary market in August.

With a three-day week ahead, traders would not like to carry forward their positions over the holidays on Wednesday and Thursday. So some stability is likely by Tuesday. Hurricane Irene powering towards US east coast is also likely to distract investors from their trading terminals.

Monthly oscillators have deteriorated and declined to the bearish zone. But the action in weekly oscillators is quite interesting. Weekly relative strength indices have reached heavily over-sold levels last recorded in October 2008. The positive divergence in the daily rate of change oscillator is also comforting since it shows that the downtrend is losing momentum in the short-term.

There is no doubt that the Sensex is deeply oversold from a short-term perspective. Immediate supports on the chart are those mentioned last week - at 15,650 (trough formed in February 2010) and 15,330 (trough formed in November 2009). Extrapolation of the down-move from 21,108 peak gives us the target at 15,955 (1:1) relationship.

Targets of the minor wave-count from 19,131 peak fall at 15,806 and then 15,347. In other words, investors can watch for a re-bound from the zone between 15,300 and 16,000 in the days ahead. Resistance will be at 16,250 and 16,560. Close above 17,000 is required to signal that the index is on a path of sustained recovery.

Reviewing 2011 outlook

It was all bright and sunny when 2011 began with the Sensex at 20,509 and the Nifty at 6,134. Despite the volatility in the last quarter of 2010, the indices were just a whisker's breadth away from a new life-time peak.

We had given the upper target at 28,950 and lower target at 16,000 in 2011. Now that the index is testing out the lower target, a review of this outlook is necessary. Readers however need to bear in mind that one day's breach of significant long-term supports is not enough to cause consternation. The index needs to remain below it for a couple of weeks more to signal further erosion.

In our 2011 outlook, we had expected the first half of the year to be strong with the index breaking to a new peak. So what went awry? In our broader technical analysis, we use a top-down approach wherein the trends and prospects of global indices, especially the US indices is factored in to the analysis. While this approach helped us to stay on the right track over the last five years when the Sensex' correlation with Dow and other emerging markets was more than 0.9, it led us off the track as the correlation of our market with the US became negative in the recent correction.

It needs to be noted that the Dow rallied 11 per cent in the first five months of 2011 and the DJ Euro STOXX 50 rose 10 per cent in the January and February. On the other hand, the Sensex declined 7 per cent largely due to inflation and the RBI's aggressive rate hikes.

It is this weak link with other global indices that has taken the Sensex to the lower end of our yearly range at 16,000 this week. We stay with our bullish long-term expectations mentioned in the 2011 outlook published on January 2 this year.

The Sensex is currently testing the 16,000 level that is extremely critical for the long-term outlook for our market. As we had been explaining before, if the index stabilises around this level, it will spend a year or more in the range between 16,000 and 21,000 before breaking out to our long-term targets.

If the 16,000 level breaks conclusively, subsequent supports are 14,577, 13,036 and 12,397. The long-term view will continue to stay positive as long as the index does not emphatically break below 13,000.

Nifty (4,747.4)

The Nifty too took it on the chin last week, declining below the much-watched 4,800-mark. As we have been reiterating, there is a slew of supports in the zone between 4,750 and 4,900. The 1:1 extrapolation of the downward move from 6,335 peak gives us the target at 4,787 around which the index is currently hovering. The troughs formed in 2009 and 2010 at 4,692 and 4,538 will be the next short-term supports if the decline continues.

But it is imperative for the index to recover from these levels if the long-term outlook for our market is to remain positive. Sharp recovery from either of the levels mentioned above, after an intra-week dip, can make the index fluctuate in the range between 4,500 and 6,300 for a few years before it moves higher.

However break below the 4,500 level will lead to decline to 4,437, 3,989 or 3,800 before the index recovers.

Immediate supports for the Nifty if the decline continues will be at 4,740, 4,720 and 4,692. If these supports are breached, a dip to 4,604 will be on. Resistances will be at 4,870 and 4,964. Close above 5,100 is needed to signal that the index is on the road to sustainable recovery.

Global Cues

There was some stability in the global markets last week on hopes that the Federal Reserve Chairman, Mr Ben Bernanke, would announce measures to stimulate the US economy.

US markets led the surge with the Dow closing 467 points higher for the week. The VIX remained at elevated levels between 34 and 44. But it closed the week seven points lower indicating that nervousness among investors has not risen further.

European markets halted the scary plunge witnessed since the first week of August to close slightly higher. DJ Euro STOXX 50 held around 2,150 and ended a per cent higher. Other Asian markets too did not lose much ground and closed marginally higher.

Surprisingly, it was the US market that closed the strongest last week despite the US economy being at the eye of the current storm.

Investors need to watch if the key long-term support around 10,400 holds in the days ahead. Resistances for the near term will be at 11,450 and 11,920.

Gold was extremely volatile, first hitting the high of $1,911 and then plunging to $1,702, all within a week. The level that short-term investors need to watch is $1,750. As long as the metal closes above this level, it will be a buy-in-dips market.

Published on August 27, 2011
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