Technical Analysis

Index outlook - Bulls in retreat

Lokeshwarri S K | Updated on March 12, 2018 Published on July 28, 2012



The spectre of sovereign debt default in euro zone reappeared last week, spooking both the Sensex and the Nifty. Both the indices opened with downward gaps on Monday morning and continued tumbling downhill till Friday. Traders who were betting on stock prices rising further in the weeks ahead had to unwind their positions ahead of the expiry of July derivative contracts stoking the volatility further.

Deficient monsoon and its consequence also began affecting the market morale and corporate earnings could not do much to rectify the mood. There was intense drama on Thursday as several mid-cap stocks such as Tulip Telecom and Everonn Education took a sharp drive on rumours of brokers unwinding pledged shares.

Volumes spiked higher on Thursday, the day of the expiry. Derivative volume on NSE crossed Rs 2,00,000 crore on that day. Put call ratio in index options declined below 1 and open interest fell below Rs 1,00,000 crore implying that many traders were forced to unwind their position. Foreign institutional investors were net sellers in equity in most sessions last week. But their tally for net purchases in July stays at $1.5 billion.

The week ahead would be news-heavy with the RBI and the Federal Reserve holding their monetary policy meetings next week. Progress of monsoon, PMI numbers and earnings announcements will be other drivers in the short-term.

Oscillators in the daily chart moved deep into oversold zones. The Sensex declined below its long-term 200-day moving average on Thursday though it is just hanging onto that support now. The long lower shadow in the weekly candlestick chart implies that the index is trying to halt its current slide.

Sensex (16,839.2)

The Sensex recorded the intra-week low of 16,598.5 before regaining some ground on Friday to close 320 points lower. Key short-term support that investors need to watch now is at 16,467. The short-term guideposts for investors are as under:

Upward reversal above 16,467 will take it higher to 17,631 or 17,762 in the upcoming sessions.

Short-term view will, however, turn negative if the index closes below 16,467. It will mean that the index is moving lower to 15,916 or 15,748.

Movement between 17,000 and 17,500 will retain the positive short-term view.

Medium-term trend in the index is sideways. The movement since the 15,135 low appears to be the correction of the down-move from 21,108 peak. If the Sensex reverses above 16,467, it will imply that the C wave of this correction is sub-dividing further and can take the index up to 18,481 or 18,523 again.

Investors need to bear in mind that there is long-term resistance at 18,826 that could prove to be the ceiling for this year.

The Nifty (5,100) too hit the intra-week low of 5,032.4 before reversing higher on Friday. Key short-term support for the index is at 4,991. Short-term traders should not initiate fresh long positions if the index moves below this level. That will imply that the Nifty is heading towards 4,816 or 4,770 in the near-term.

Conversely, reversal above the 5,000 mark will mean that the index can move on to 5,227 or 5,348 again.

The Nifty is also poised at a very significant junction from a medium-term stand-point.

Sharp up-move from current levels can take the index higher to 5,389 or 5,610 over the medium-term.

But the breach of the support at 5,000 will mean that the index can head lower to 4,488.

Global Cues

Global markets remained in a sideways range but ended the week on a slightly positive note. European indices strengthened on statement from the French President and German Chancellor that they are committed to support the euro zone.

The CBOE Volatility Index spiked in the beginning of the week hitting the high of 21 on Tuesday.

But it declined from there to close at 16.7 implying that investors were feeling more sanguine towards the end of the week.

The Dow moved beyond the 13,000 level despite the US economy growing at just 1.5 per cent in the second quarter. This is slower than the 2 per cent growth in the previous quarter.

The index has now overcome the resistance at 12,850.

Short-term target for the index remains at 13,338.

Medium-term targets on close above 13,338 are 13,848 and the index’s all-time high at 14,198. Short-term view will stay positive as long as the index trades above 12,450.

One of the worst performing markets in recent times is the Chinese stock market. The Shanghai Composite Index is down 13 per cent since the beginning of May.

The index is also testing the medium-term low at 2,132. Breach of this level will be negative from a medium-term perspective.


Published on July 28, 2012
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