Technical Analysis

Index outlook: At the 16,000 bastion

Lokeshwarri S. K. | Updated on November 15, 2017 Published on May 19, 2012



There was mayhem in global financial markets last week with stock prices crashing, currencies spinning out of control and bank deposit holders in Spain and Greece stampeding to withdraw their money and run. Given this backdrop, Sensex and Nifty need to be lauded for losing less than one per cent during the period.

Greece's failure to form a coalition government and the announcement of fresh elections in June perpetrated last week's turbulence. Fears of Greece exiting the European Union caused Euro to plunge against dollar. The resulting dollar strength made other currencies plummet including the Indian rupee that declined to a life-time low of 54.9.

The rating agencies also got into the act, stoking the panic. Moody's made a sweeping downgrade of 16 Spanish banks, including Banco Santander. Fitch downgraded Greece government debt deeper into junk category and Moody's went on to downgrade a bunch of Indian private banks and LIC too. Thankfully, Indian investors were blasé and shrugged off this move.

There is no clear trend available in FII activity. They were net buyers in some sessions and net sellers in others. For the month of May, they have net purchased stocks worth $54 million. Their tally for this calendar stays at $8.5 billion. This implies that FIIs are not responsible for the current bout of weakness.

Short-covering in derivative segment appears to have triggered Friday's rebound, since derivative turnover spiked above Rs 1.5 lakh crore in that session. Put call ratio remains below one implying that market is getting over-sold. SBI's earnings and Facebook's debut elevated the mood slightly close to the weekend.

It is not likely that things will improve suddenly. The course of the rupee, the unfolding drama in Europe and the policy reactions by the Government all will impact stock price moves next week.

Momentum indicators in the daily chart have not deteriorated much last week and continue to move sideways at lower levels. Weekly oscillators are now beginning to move into oversold zone. The psychological support at 16,000 appears to be cushioning the Sensex at present. The Sensex formed a bullish engulfing candlestick pattern on Friday. But it is too soon to assume that a bottom is in place.

Sensex (16,152.7)

Sensex declined to intra-week low of 15,809, but rebounded strongly from there to close above the 16,000 mark. As explained last week, it is now fairly obvious that the third leg of the down-move from 21,108 peak is currently in progress. This leg has the targets of 14,831 and 12,550. A weak third leg is quite possible that can end around the low made last December at 15,135. This is the scenario that we have to hope for now.

But if a collapse akin to that in October 2008 occurs than we have to brace ourselves for decline to the second target.

If we drill down to the minor waves, we get medium-term targets at 16,016 and 15,080. 1:1 extrapolation of the wave from 18,523 gives us the target at 16,016.

The index is attempting to stabilise itself around this level currently and a halt around these levels is possible.

For the week ahead, the Friday's bounce can extend to 16,428, 16,701 or 16,812.

Inability to move beyond the first hurdle will drag the Sensex lower towards 16,021, 15,770 or 15,481. Close above 16,800 is needed to indicate that the short-term trend is reversing upward.

Nifty (4,891.4)

Nifty recorded intra-week low at 4,789 before rebounding to end just 37 points lower. The third leg of the down-move from 6,338 gives us the long-term targets of 4,512 and 3,822. Since the first target occurs close to the previous low at 4,531, investors can look forward to the index bottoming around this area.

Third leg of the down-move from 5,630 peak gives us the next targets at 4,884 and 4,600.

Nifty has already achieved the first target and is attempting to reverse higher from here.

Short-term traders holding short positions should watch out for a sudden reversal from this level. Immediate resistances for the index are at 4,904, 4,975 and 5,092.

Traders should close their short positions if the index moves above 5,092. Reversal below 5,092 will imply that the index can move lower to 4,758, 4,635 or 4,494 in the upcoming sessions.

Global Cues

Global equity market recorded sharp losses last week. As panic spread, CBOE volatility spiked towards 25, a 4-month high. Latin American indices including Brazil's Bovespa took a sharp hit. The Dow moved decisively below the 12,750 mark implying that the short-term trend has turned lower. Immediate support that now needs to be watched is at 12,000. Breach of this level will usher in a medium-term downtrend in the index.

The long-term uptrend in Dow will, however, not be threatened unless the index goes on to close below 10,500.

Asian benchmarks such as Jakarta Composite Index and KLSE Composite Index also firmly reversed lower.


Published on May 19, 2012
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