Technical Analysis

Index Outlook: A step closer to a new high

Lokeshwarri SK | Updated on March 10, 2018 Published on September 03, 2016

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PO05_Index_outlook

The near-term trend in the indices has turned positive with the break-out last week

Just as Aragorn observed during the battle for middle-earth in ‘The Lord of the Rings’, the wind is changing for Indian equity markets, turning the outlook more favourable. The Sensex and the Nifty are up more than 26 per cent since the February lows even as worries regarding earnings slowdown, lack of investment demand and regulatory logjam persist. Both the indices have managed to cross over significant medium-term hurdles, setting the stage for a new high soon. With commodity prices stabilising and China and other emerging economies growing at a reasonable pace, fear of an imminent global recession has receded. The Brexit too is a few more steps away from becoming a reality.

The Damocles sword of another Fed rate hike is unlikely to fall in September as the ISM Purchasing Manager’s Index reading for the US was a shocking 49.4 in August, down from 52.6 in the previous month, denoting contraction in production. With the jobs data declared on Friday too weaker than expected, the Fed will find it very hard to hike rates in its September meeting. That could spell temporary relief for markets.

The brisk progress of the monsoon this year will spell relief for rural India, and the multitude employed in the agri sector, after the scanty rains in 2014 and 2015. According to the latest data released by IMD, 67 per cent of the country has received normal rainfall this season while 20 per cent has received excess rains.

Good rains coupled with the Seventh Pay Commission payouts can result in a good festive season for white-goods, auto, real estate and jewellery makers. Operating and net profit of companies have shown some improvement in the first quarter of this fiscal. India’s Manufacturing PMI data for August too indicates that there could be some pick-up in manufacturing activity.

Markets could however, turn nervous as they approach their former peaks and a correction is possible. Such a fall can be used by investors to buy stocks that still offer value.

Foreign portfolio investors have been supportive, net purchasing close to $1.35 billion of stocks in August. Net purchases for the year are $6.3 billion. Market internals are quite upbeat too. Turnover in both the cash and derivative segment of the NSE hit record highs in July and August. Interestingly, the put-call ratio in Nifty is 1.13, indicating that many traders are betting on stocks falling from here.

In the truncated week ahead, markets will keep an eye on the monsoon’s progress. Global cues such as the movement of the dollar and crude will also influence domestic stock prices.

Nifty 50 (8,809.6)

The Nifty managed to break above the resistance at 8,700 last week to close above the 8,800 level.

This week: The daily rate of change indicator that had been signalling lack of momentum since mid-July has moved into the positive zone, signalling a buy. The daily moving average convergence divergence (MACD) indicator too is bullish.

The index is just arm’s length away from its all-time high of 9,119 and a new high appears quite possible, well before the festive season. Short-term targets for the index, once it opens on Tuesday will be 8,938 and 9,044. There is likely to be strong psychological resistance as the index approaches the 9,000 level. So, do watch out for turbulence around these levels.

Short-term supports will be at 8,718 and 8,654. Dips to these levels should be used to take fresh long positions. The positive short-term view will be negated only on a close below 8,500.

Medium-term trend: The medium-term trend in the Nifty has been up since the late-February lows and a strong close below 8,000 is required to reverse this outlook. The index made a tentative breakout last week following a protracted sideways move. The action in the early part of the week is therefore, critical in determining that this is not a false break-out.

If this is a continuation of the wave from 7,927, the index can proceed to 9,038 and 9,344.

The shallow corrections witnessed since the February low indicate inherent demand for Indian stocks. The strong break above the 8,300 mark, that is the 61.8 per cent retracement of the previous down-move, is also a positive from a medium and long-term perspective. Investors should therefore, utilise corrections to buy stocks as long as the Nifty trades above 8,000.

Sensex (28,532.1)

The Sensex too managed to break above the short-term hurdle at 28,300 last week.

This week: The short-term trend has turned positive with last week’s move. Continuation of the upmove can take the Sensex to 28,941 and 29,332. The momentum indicators in both the daily and the weekly charts are quite bullish. Short-term investors can therefore, buy on dips as long as the index trades above 28,000. There is a short-term support just above, at 28,243.

Medium term: The medium-term outlook for the Sensex has been up since the Budget day of 2016 and a strong close below 26,200 is required to negate this trend. Initial medium-term targets for the index are 29,130 and 30,104.

Global cues

Most global indices have rallied strongly from the lows recorded in February this year. Many have moved on to new life-time highs such as Argentina’s Merval and the Dow Jones Industrial Average. Indices such as Brazil’s Bovespa and Russia’s RTS have rallied close to 60 per cent from the lows recorded in the early part of the year when commodity prices were in a tailspin.

The CBOE VIX is below 20 since July, indicating that investors are quite complacent about the sustainability of the current rally. The Dow and the S&P 500 moved to new life-time highs in mid-July, but have been trading in a very narrow range since then. This does not appear to be a distribution pattern and an upward break-out appears a greater likelihood. A strong close below 2140 in the S&P 500 is needed to negate this outlook.

Published on September 03, 2016

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