Technical Analysis

Index outlook: Market enters a turbulent phase

Lokeshwarri S K | Updated on November 19, 2014 Published on August 09, 2014



Ongoing tensions in West Asia and Europe will keep stock prices under pressure

Israel launched air strikes across the Gaza Strip, US began air strikes on Iraq, and Russia moved troops to the eastern border of Ukraine.

With the political leaders on the war-path, it is no wonder that financial markets are quivering. Most global equity markets closed the week with losses. The Sensex and the Nifty were relatively resilient, losing less than one per cent.

The week began on a sober note with the RBI keeping rates unchanged in its monetary policy. Indices moved slightly higher in the early part of the week.

It was the fear of crude prices increasing due to escalating tensions in West Asia that sent the rupee lower to 61.7. This in turn made stock market wobble and fall, especially on Friday.

Investors will continue to watch global events unfurl in the truncated week ahead. It is a data-heavy week with industrial production numbers as well as inflation numbers scheduled for release.

As latebirds rush in to announce their earnings, investors will have their hands full keeping track of the change in their financial position.

The deficit in monsoon has shrunk further to 18 per cent by the end of last week. But foreign portfolio investors have turned net sellers in both equity and debt, in many sessions.

Volumes were strong in derivative markets while it was subdued in the cash segment.

Oscillators have dipped deep into the negative zone signalling a reversal in the short-term trend.

The weekly oscillators giving a sell signal spells trouble for the medium-term trend. But the decline needs to extend one more week to indicate that the medium term trend will reverse. .

Sensex (25,329.1)

The decline in the Sensex in the latter part of the week resulted in weakening of the short-term trend.

The week ahead: The Sensex appears to be in the third part of the downtrend that commenced from the 26,292-peak. This wave has 25,095 and 24,580 as its targets.

As mentioned last week, the index has support between 25,375 and 25,450, where the 50-day moving average is also positioned.

Short-term traders should avoid long positions on a close below 25,375. Next targets are 25,095, 24,892 and 24,580.

On the other hand, reversal from current level can take the index higher to 25,653 or 25,924. Inability to move above the first resistance will be the cue for traders to initiate fresh short positions.

Medium-term trend: The medium-term trend in the Sensex continues to be up. But it is on the verge of reversing lower. We stay with the view that the key medium-term trend deciding level for the Sensex is 24,000. Weekly close below this level is required to turn the medium term view to negative.

The index will continue to face resistance in the range between 26,000 and 26,500. Target on a breach of this level is 27,304 and 27,848.

Nifty (7,568.5)

The close below the 50-day moving average at 7,610 last week spells trouble for the Nifty. Unless the index manages to clamber above this level early next week, the downtrend can intensify.

The week ahead: In our last column, we had indicated that the index needs to close below 7,570 to turn the short-term trend negative.

The index is poised at this level now. Fresh long positions should be avoided if the index dips below this level. Subsequent targets are 7,512, 7,422 and 7,352.

On the other hand, reversal from these levels will take the index higher to 7,665 and 7,726. Inability to move above 7,665 will be the cue for short-term traders to initiate fresh short positions.

Medium-term trend: The medium-term view in the Nifty remains positive. We will retain this view as long as the index trades above 7,100.

Resistance for the index is in the zone between 7,800 and 7,900.

Global cues

Global markets took a deep cut last week, extending the medium-term correction that began in June. European indices were badly affected and the DJ Euro STOXX 50 dropped further to confirm an ongoing medium-term downtrend.

Surprisingly, US investors do not appear to be too affected by the ongoing political tensions. The CBOE volatility index that reflects the sentiment among US investors moved sideways in a range between 15 and 17 for most part of the week without making any further headway.

This complacency was reflected in the movement of the Dow Jones Industrial Average that declined to the low of 16,333, but closed the week above the support at 16,500.

This implies that the short-term trend in the index continues to be up. A strong close below 16,000 is needed to turn the short-term view negative in the index.

That said, the region between 17,000 and 17,500 will continue to thwart rallies in the index. Nikkei was the worst affected last week, losing around 5 per cent.

Published on August 09, 2014
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