Index outlook: Cracks in the long-term trend

Markets continued to be in the bear’s grip dragging the benchmark indices to fresh lows for the year. But investors can take heart from the fact that bulls are putting up a fight to protect the 8,000-bastion in the Nifty.

Worries over earnings and the poor progress of monsoon have overshadowed the slew positive signals that emanated on the economy front. Indirect tax collection in May has jumped 37 per cent, signalling strong manufacturing activity. This is supported by the manufacturing PMI climbing to 52.6 in May. The World Bank’s outlook for 2015, despite being negative for emerging markets and the entire global economy, was a positive for India.

Market can open Monday’s trade on a positive note, thanks to the sharp increase of 4.1 per cent in industrial production in April. The pick-up in manufacturing led by 11 per cent growth in capital goods is especially good news for those looking out desperately for signs of economic revival. The small increase in the growth of consumer inflation to 5 per cent in April is not too disturbing.

But market being market, it is doubtful if it will be able to stay cheerful for long based on these news. Worries over the Fed’s next move will re-surface as the FOMC is set to meet mid-week. Consumer and wholesale price inflation numbers will also cast their shadows on the trading activity next week.

The worrying factor is that technical indicators are beginning to deteriorate on the weekly and monthly time frame. If the decline continues next week, the medium-term trend will come under threat.

Foreign portfolio investors turned net sellers last week. But their net sales in June is just around $200 million, which is small compared to the inflow of $6.6 billion so far this year. Nifty put call ratio well below 1 signifies that the market is oversold at this point.

Nifty (7,982.9) The Nifty recorded the intra-week low at 7,940, just below the support of 7,961 formed on December 17, 2014. The recovery from here is not too strong and the index needs to rally strongly next week to show us that this support has held. Close below 7,960 will be quite a setback for both the medium as well as the long-term uptrend.

The 50-day moving average in the Nifty is also poised on the verge of moving below the 200-day moving average. This is another negative signal since the 50-DMA has remained above the 200-DMA since the bullish crossover in November 2013.

Momentum indicators in both the weekly and monthly charts are also in bearish formations. Any further decline will mean that we need to brace ourselves for a deep dive before the indices are able to find the next floor.

The week ahead : The Nifty hit the intra-week low on Friday and has closed near this level. We need to watch out for the support around 7,950 now. Close below this level will mean that fresh long positions should be avoided. On the other hand, a strong close above 8,000 will be a temporary victory for the bulls.

Immediate resistances for the coming week will be at 8,150 and 8,284. A rally that fizzles out around the first resistance will provide the right opportunity for initiating fresh shorts with a stop-loss at 8,300.

Downward targets in the event of slide are 7,822 and 7,795.

Medium-term trend : There is no alteration in the count we had outlined last week. The third part of the move from the 9,119 peak is now in motion. The targets for this move are 7,795 and 7,367.

The psychological support at 8,000 and other string of lows formed close to current levels are holding up the index now. But marked deterioration in momentum indicators implies the need for caution, especially for those holding long positions.

Sensex (26,425.3) The Sensex too moved slightly below the low formed on December 17, 2014, and has closed near this level. While the 50- and 200-DMA crossover is yet to happen in Nifty, it has already taken place in the Sensex, signalling a rocky road ahead.

The week ahead : There could be a rally in the early part of the week to 27,000 or 27,422. It will be best to unwind your long positions if the index is unable to move above 27,000. Short-term view will turn positive only on a close above 27,422.

Downward targets for the index are 25,909 and 25326.

Global cues It was a quiet week for most global indices. They closed with mild profits or losses after a volatile week. Investors, especially in the US, however, appear to be getting restive. The US markets have been among the most resilient this year, and investors are repeatedly looking over their shoulders for a sudden correction. This edginess is manifesting itself in the CBOE VIX’s rise from the recent lows.

The Dow Jones Industrial Average continued to display resilience, recovering from the short-term support at 17,800. Reversal from this level implies that the index can attempt to move to the upper end of its current trading band at 18,300 soon. Support below 17,800 remains at 17,500.

The movement in NYMEX crude prices shows that the commodity is getting set to move a little higher from these levels. It has been moving in the range between 57 and 62 since the beginning of May. This appears to be a halt before the contract attempts to move to the 67-68 zone.

COMMENT NOW