Technical Analysis

Index Outlook: Entering a tricky terrain

Lokeshwarri S K | Updated on March 10, 2018

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As the Fed rate hike nears, stock markets could get more volatile



It is global cues that will determine the movement of Indian stocks from hereon as we draw closer to the FOMC meeting in which Janet Yellen will almost certainly raise rates.

Surprisingly, the US market appears to have accepted a 25-basis-point hike in the December meeting and the S&P 500 is perched quite close to its life-time high.

But the impact of this move on our market is evident in the behaviour of the foreign portfolio investors. FPIs continued selling in December; they have sold ₹2,362 crore of Indian stocks so far this month. This follows net sales of ₹7,074 crore in November.

Indian indices tried to hold on to higher levels in the initial part of the week. But they gave up thereafter, leading to a sharp slide in the indices in the last three sessions of the week.

Raghuram Rajan did not throw any surprises — either positive or negative — in the monetary policy, gracefully passing on the baton to his peer, Draghi. The European Central Bank Chairman failed to deliver to market expectation.

Now ‘market’s expectation’ is really hard to live up to as financial markets can ask for the moon. This time they wanted an ECB stimulus that could negate the impact of a Fed rate hike.

This expectation of a large stimulus had made traders build huge short positions in euro. These had to be covered once it became evident that the euro was not under threat.

This led to a short-squeeze, sending the euro higher and the dollar lower. Amidst this drama in the currency markets, the OPEC lifted the cap of the group’s oil production from 30 million barrels a day to 31 million barrels. This made crude oil prices plummet, adding to the turbulence in emerging market equities.

Since India tends to get clubbed together with other EMs, it cannot escape an EM sell-off, despite falling crude oil prices helping India’s economy. Industrial production numbers to be released next week will influence the trade to some extent. Two pharma IPOs — Alkem Labs and Dr Lal PathLabs — open next week. The response to these issues will also be keenly followed by investors.

Nifty 50 (7,781.9)

The Nifty could not hold at higher levels and slid towards its previous low recorded in mid-November.

The daily oscillators that had moved into the bullish zone reversed with last week’s fall to decline into the bearish zone once again. The weakness in the weekly oscillators is of greater worry since it means that the mild bullishness in the medium-term outlook now stands negated.

The week ahead: The Nifty failed to move above the resistance zone at 8,000 indicated last week and is heading lower. The formation of three black candles on the daily chart implies that the downtrend can extend since each candle opened with a gap and closed near the day’s low.

Immediate targets for the Nifty are 7,714 and 7,678. Since these are also key medium-term supports, traders should tread cautiously as the index nears this level.

Resistance for the coming week will be in the 7,950 to 8,000 zone. The short-term outlook will improve only on a strong move above 8,000. Else, traders can use rallies to initiate fresh short positions.

Medium-term trend: The reversal last week appears to be a resumption of the medium-term downtrend. But investors need not worry as the Nifty has strong support in the 7,300-7,500 band. Investors should therefore, watch out for buying opportunity as the index draws close to this zone.

The outlook will deteriorate significantly only on a sharp decline beyond 7,363.

Sensex (25,638.1)

The Sensex too is on a rapid decline.  

The week ahead: The Sensex reversed from the resistance zone indicated last week. It can now decline to 25,453, 25,287 or 24,851. But since the area around 24,500 is a key medium-term support as well, investors should watch out for buying opportunity at these levels.

Bank Nifty (16,897.3)

The Bank Nifty reversed from the resistance at 17,500 indicated in our last column and moved lower.

Immediate target for the index is 16,587. Decline below that level can take the index further down to 15,762.

Resistances will be at 17,500 and 18,000.

Global cues

Most global indices gave up some of their gains, disappointed with the ECB’s stimulus measures and nervous at the renewed decline in crude oil prices.

The CBOE volatility index too rose to 18, after two successive weeks of declines, reflecting the nervousness among option traders in the US.

European benchmarks, such as the DAX and CAC turned weak, dragging the DJ Euro STOXX 50, 145 points lower.

The Dow Jones Industrial Average has been extremely volatile, up one session and down in another.

It however, managed to close the week on a positive note.

Published on December 05, 2015

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