Technical Analysis

Index Outlook: Bear squeeze can spur stocks

Lokeshwarri S K | Updated on March 12, 2018 Published on March 24, 2012



Stocks were initially subdued, assimilating the nuances of the Union Budget.

But they took a sudden dive on Thursday as the coal scam rocked Parliament.

The Government rolling back train fare hike also did not go down well with market participants. The Sensex closed 400 points lower in that session while the Nifty closed 136 points down.

Despite the wild intra-week movement, the indices have not lost much ground last week. Both the Sensex and the Nifty have lost less than 1 per cent. Volumes were sedate in the initial part but picked up on Thursday as stocks began rolling down.

Spike in index put-call ratio denotes that traders are once again beginning to bet on a steep decline and piling up short positions. Open interest is also beginning to inch higher, towards the Rs 1,50,000 crore mark.

One group of investors that has steadfastly stood by Indian equity this year are the FIIs. Their net purchases for 2012 have exceeded $9 billion so far. Their tally for the month of March is $1.7 billion.

Derivative expiry on Thursday will dominate market proceeding next week. Burgeoning open interest shows that traders are feeling more confident about the market direction. But a bout of short covering can send stocks sharply higher.

Oscillators in the daily chart are dipping in line with the short-term downtrend.

Weekly oscillators are moving sideways in the neutral region implying that the ongoing correction has not reversed the positive medium-term trend.

Sensex (17,361.7)

The Sensex declined to 17,211 and then rallied to 17,687, only to slip again to end the week on a flat note. Short-term trend in the index is down since the 18,040 peak.

But the index is poised at a very critical medium-term support band between 17,000 and 17,300. The 38.2 per cent retracement of the previous up-move from 15,135 low occurs here. Presence of the 200-day moving average at 17,126 adds to the significance of this zone.

Reversal from this zone will mean that the index will move on to 18,523 and then to 19,094 in the upcoming months.

Rallies will face resistance around 19,000 and it is hard to envisage a move above this in the medium term.

If the index declines below 17,000, the supports at 16,829 or 16,429 will cushion it. Long-term view will turn negative only on a strong close below 16,400.

The index is trudging sideways over the past few sessions.

Short-term outlook will stay negative as long as the index trades below 17,750. Immediate support is at 17,174. Subsequent targets are 17,008 and 16,858. Short-term resistances will be at 17,700 and 18,040.

The Nifty (5,278.2) too is in a short-term down trend. If the week begins on a shaky note, the index can slide to 5,221, 5,171 or 5,155.

Traders holding short positions ought to tread carefully in the zone between 5,150 and 5,250. There is a cluster of important supports in that region including the 200-day moving average.

A bounce from this zone can form a significant medium-term low that sets off the third leg of the rally from December 2011 low. This leg has the minimum target of 5,850.

Rallies in the near-term will face resistance at 5,350 and 5,468. Short-term view will turn positive on move above the second resistance. Next target will be 5,630.

Global Cues

Global indices held on to higher levels, though they could not progress. Worries on slowing growth in China and Europe coupled with weak home sales data in the US kept a lid on stock prices.

CBOE volatility index remained at a 11-month low around 15.

As we have written earlier, any further decline will take the index below the trough formed in April 2011 and that will augur the onset of a strong bull phase.

The Dow too moved in a very narrow band between 13,000 and 13,270.

That has ensured that trends along all time-frames remain unaltered.

Medium-term target for the index, once this uptrend resumes, is the October 2007 peak at 14,198.

Elliott wave target for the uptrend from March 2009-low gives us the minimum target at 14,364.

Investors can continue to look forward to a new life-time high this year as long as it trades above 12,200.

Asian benchmarks too closed slightly lower though they continue to be in medium-term uptrend.

Nymex crude futures traded at elevated levels between $104 and $108.

Key long-term resistance for this contract is at $103.

It is currently trading just above this level.

Move below $103 is required to imply that the commodity could cool down. Else it can move up further to $126.

Published on March 24, 2012
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