Index Outlook: Get ready to shop for blue-chips

The D-day is finally here — the day on which the US Federal Reserve finally ends its easy monetary policy and moves its funds rate one notch higher. Markets have been quailing at the thought for more than a year now and many of the indices in the emerging markets have already declined quite a bit in anticipation.

The Sensex and the Nifty are also down 14 per cent from the March high. Both the indices have also drawn close to important long-term support levels.

If we consider the Fibonacci retracement levels of the up-move that began in June 2012, 38.2 per cent retracement occurs at 24,600.

This is a critical support from a long-term perspective. This is just 400 points away from where the Sensex is currently poised. The corresponding level for the Nifty occurs at 7,457.

If the ongoing move is a pull-back in a long-term bull market, the current phase of decline can find a base around these levels. So instead of panicking about the index hitting multi-year lows, it will be better to get the shopping list of your favourite blue-chips ready to start buying them as indices move lower.

The mood in the market is of course pretty glum due to the shenanigans of our politicians in the National Herald case. The repercussion on key Bills pending in Parliament has made investors down-beat.

But green-shoots are finally beginning to appear in the economy and the recovery could gain traction in the coming year. Indian equity prices should also start factoring in the recovery and start moving higher.

If the first rate hike is finally pushed through by the Fed, it will get a major uncertainty out of the way.

Markets will start looking ahead at the expected push to consumption from the Pay Commission pay-outs, the drop in interest rates and lower commodity prices.

Interestingly, the cut in the BSE mid and small-cap indices is milder at 8 per cent.

What this means is that even if the weakness continues for some more time, the large-caps will find a floor soon and start stabilising. The smaller stocks could however continue to experience pain.

The Nifty lost another 171 points last week and closed near the week’s low.

The week ahead: The Nifty fell below our outermost short-term target last week. We now have to watch the low formed on September 8, at 7,539.

The Nifty can attempt to form a double-bottom around this level.

Any further fall will take the index towards the medium term targets of the down-move from 9,119-peak. The first target of the C wave of this move is 7,359. As mentioned above, Fibonacci retracement target of the long-term up-move from 2012 gives us a support at 7,457.

Putting it all together, the zone between 7,350 and 7,500 should be where this leg of the ongoing downtrend halts. Investors, therefore, ought to watch out for reversal from here. The long-term trend will be under a threat only on a breach of 7,350. Resistances for the coming week are at 7,729 and 7,827.

The Sensex extended its fall by declining 593 points in the previous week and settled near the week's low.

The weak ahead: The index slipped below the second support mentioned last. Nevertheless, it tests the key medium-term support at around 24,500. Also, the low formed on September 8 is at 24,833 and the key Fibonacci retracement level at 24,600 makes the range between 24,500 and 25,000 a vital base zone. Any declines can take support in this range.

A decisive fall below 24,500 will be threat for the index. Support below 24,500 is at 24,217. Significant resistances are pegged at 25,450 and26,100.

The Bank Nifty too fell sharply last week. Friday's 2.2 per cent decline extended its weekly loss to 3.3 per cent.

The index has decisively fallen below our immediate target level of 16,587, opening the gate for further declines to 16,000 or 15,762 in the coming weeks.

However, the index could come to a halt at these support levels. Key short-term resistances are at 16,650, 16,800 and 17,000. Significant medium-term hurdles are at 17,500 and 18,000.

Global indices continued their declines as crude oil tumbled to multi-year low. It fell almost 11 per cent last week to settle at $35.6 a barrel. This dragged the commodity shares down and the boarder index S&P 500 saw a biggest fall in two months. The US dollar index also slumped for a consecutive week to close at 97.5.

The CBOE volatility index skyrocketed 64 per cent to close at 24.3 indicating higher level of nervousness.

The Dow tumbled 582 points or 3.3 per cent to close at 17,265 last week. The index has emphatically breached the support level of 17,500 and is heading towards the next at 17,000. Key resistances are placed at the levels of 17,500 and 17,900.

COMMENT NOW