Technical Analysis

Index Outlook: It is time to watch your step

Lokeshwarri SK | Updated on November 19, 2014 Published on March 30, 2014

The indices are winging higher. But the presence of medium-term targets in the vicinity calls for caution

Another fast-paced week awaits us in the equity market. All eyes will be on Raghuram Rajan as he unveils the monetary policy on Tuesday.

While most market participants do not expect a reduction in policy rates just yet, the tone of the Governor, depending on which avian species he favours, will influence stock prices.

The country will be at fever pitch as the polling dates near and the antics of politicians will keep everyone riveted.

The cocksure attitude of the market participants – that the NDA Government will take charge at the Centre and it will set forth a blitzkrieg of reforms that will transform Indian economy – will tone down a little as the election date draws near. Indian companies will also get set with their quarterly report cards causing stock-specific activity.

There was no dearth of excitement last week as the Sensex and the Nifty broke free of their fetters to soar to new highs.

With the shattering of the 22,000 ceiling in the Sensex and the 6,500 level in the Nifty, the sentiment has become extremely bullish and market participants have started dreaming of a roaring bull market soon. While this is possible, (see our long-term forecast below) the Sensex and the Nifty have not yet broken past our medium-term targets of 22,500 and 6,700, respectively. Caution can also return as the election draws closer.

There is, however, no let-up in FII appetite for Indian equity. According to EPFR Global, the sentiment appears to be improving towards emerging markets in general.

Flows into Thailand, Chile, Brazil, India and Russia equity funds hit record levels last week. Continued inflows from foreign investors are required to keep the rally going.

Oscillators on the daily chart, which were on the verge of moving into the negative zone, have reversed higher once again.

The daily price rate of change oscillator has tested the zero line and is moving higher, denoting positive short-term outlook.

The MACD oscillator too is once again giving a buy signal. Oscillators on the weekly chart are also beginning to point slightly higher after moving in a non-committal sideways range since the beginning of this calendar.

The Sensex (22,339.9) was a stellar show, closing well past the 22,000 level.

Medium-term view: We had given the medium-term target for the Sensex at 22,355 and then 23,835 last week. Extrapolation of the move from the low of 15,135 gives us the target of 22,517.

In other words, there is a medium-term hurdle between 22,300 and 22,500.

Investors need to watch their step in this zone and we could see the rally temporarily reversing from this level. But a strong close beyond 22,500 will give the next target of 24,000.

The medium-term trend will come under threat only on close below 21,500.

The week ahead: Investors need to tread a little cautiously this week as the Sensex is close to a medium-term target. There are a cluster of levels from which the index can reverse lower – 22,512, 22,858 and 22,998. Supports for the week are at 22,100, 21,954 and 21,704. The short-term view will reverse only on close below 21,954.

Long-term view: We have been giving a very bullish target for the long-term since January 2011. Check out this view in the January 2, 2011 edition of Business Line.

Nifty (6,695.9)

The Nifty too broke out in a spectacular fashion beyond 6,500 last week.

Medium-term trend: In our previous column, we had given the medium-term target for the Nifty at 6,690 and then 7,158. Since the Nifty has attained the first target, investors need to tread carefully around these levels. The next medium term target on extrapolation of the move from 4,531 occurs at 6,818. So the next 100 points on the Nifty is a critical medium-term resistance zone. Target on close above 6,818 is 7,158. Key medium-term support for the index exists at 6,415.

The week ahead: The Nifty closed on a strong note last week. Extension of this rally can take the index to 6,721, 6,826 or 6,869. Watch out for reversal from either of these levels. Target above 6,869 is 7,110. Supports for the week are at 6,617 and 6,564. Investors can buy on declines as long as the second support holds.

Global cues

With the dousing of the Ukranian issue, global indices resumed the medium-term rally. The CBOE VIX also declined to a low of 13.4 indicating the improvement in sentiment among US investors.

The Dow Jones Industrial Average fluctuated at higher levels, just below its life-time high, and closed almost unchanged. Key short-term support for the index stays at 16,000.

The medium-term trend will be threatened only on a close below 15,000. Most Asian benchmarks put up a strong show but the Nifty and the Sensex outdid them all.

Published on March 30, 2014
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