Technical Analysis

Index Outlook: Market strides forward

LOKESHWARRI S.K. | Updated on November 15, 2017 Published on February 04, 2012



The week started on a wobbly note with the miscreant ‘negative global cues' creeping out yet again on Monday to yank stocks lower. The Sensex closed 370 points lower and the Nifty lost 117 points in that session. But just as the bulls began packing their bags, stocks rebounded and did not look back after that.

Global cues now in a positive garb were reported to be the perpetrators of this rebound. Just goes to show the futility in trying to find a rationale for the day-to-day swings in stock markets. The Supreme Court verdict on 2G licences provided an interesting diversion to market participants who drowning under a sea of earning announcements.

Trading interest revived as stocks continued striding forward. Cash volumes spiked higher sharply. Open interest is edging higher and stands at Rs 1,20,000 crore reflecting the confidence that traders are feeling in forecasting the market movement. FIIs too have steadfastly stood by the Indian stocks in January. They have net purchased over Rs 10,000 crore worth of stocks last month.

Markets across the globe got off to a flying start this year. The Sensex has recorded the best gains in January since 1994. Both the Sensex and the Nifty are up around 12 per cent in this period. The strong green candle in the monthly candlestick chart that could almost be a bullish engulfing pattern is also pleasing to the eye.

But the monthly chart shows that despite the daily gyrations and weekly mood swings, the benchmarks have not done much over the last five months. The Sensex is stuck in a trading band between 15,500 and 18,000 and the Nifty is in the range between 4,600 and 5,400. That nothing has changed over this period is also reflected in monthly momentum indicators.

There are two ways to interpret the sideways move over the last five months. It could either be a bottoming out process before the index moves higher. Or it could be a halt before the long-term decline resumes. Break beyond either boundary will help resolve this quandary to some extent.

Long-term trend in both the Sensex and the Nifty continue to be up. Both the indices retraced almost 45 per cent of the up-moves from March 2009 lows. As far as the magnitude of decline goes, this one is large enough to qualify as the correction of the rally from 2009 trough.

In other words, the correction could have completed at 15,135 in the Sensex and 4,531 in the Nifty. But the indices need to make some more progress before we can be sure about that.

Sensex (17,604.9)

An encouraging facet of last week's trade is the Sensex' move above its 200-day moving average (DMA) at 17,300. It also moved above the 17,400 level to end the week 371 points higher. Next targets for this rally are the October peak at 17,908 and then 18,121.

As explained above, the area around 18,000 also forms the ceiling of the medium term trading range for the index. If this level is shattered, next resistance would be at 18,826.

Supports for the days ahead would be 16,828, 16665 and 16,435. Short-term view will turn negative only on close below the first support.

Nifty (5,325.8)

The Nifty declined to the low of 5,076.7 before closing with aplomb above 5,300. The index has now moved well clear of its 200-day moving average at 5,190. This up-move shows no signs of letting up and we are fed up of looking for points from which it can reverse lower.

So we restrict to identifying next short-term targets. These are 5,400 and 5,434. Since the index is past the 38.2 per cent retracement of the down-move from 6,338 peak, 50 per cent retracement will be the next important hurdle for this index.

Medium-term target on a close above 5,450 is 5,648.

The index will receive support at 5,090, 5,015 and 4,940 in the upcoming sessions. The 200 DMA at 5,191 and recent trough at 5,076 will also provide interim support to the index. Traders can buy in declines as long as it holds above 5070. Close below this level will mean that a more serious correction is progress.

Global indices

Global benchmarks recorded strong gains last week. The outcome of the EU summit where leaders agreed on strict implementation of austerity measures appeared to please investors.

Strong US jobs data gave further fillip to stocks towards weekend. CBOE VIX moved to the low of 16.1 on Friday as stocks showed no sign of letting up on the bullish fervour.

European benchmarks such as CAC, DAX and FTSE recorded around 3 per cent gains and went on to breach significant resistances.

The Dow declined to 12,529 mid-week but it recovered from there to close at 12,862, the highest weekly close since May 2008.

The action of the index next week is critical. It can still reverse lower and move down to 11,000 or 10,400 in the ensuing months.

On the other hand, strong break above this level will result in the index moving on to 14,198 or 14,336 in the months ahead.

Short-term support that needs to be watched is at 11,900. If this level holds, the index can be expected to power higher in the upcoming weeks.

Published on February 04, 2012
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