INDEX OUTLOOK - It's business as usual

Thank you Mr FM for dwelling at length on capital market in your Budget speech.

This is probably the first time in recent history that the Budget speech has talked about the need for improving capital market penetration and reforms. We are grateful for that.

That said, tinkering with STT and the Rajiv Gandhi scheme for retail investors are too insignificant to give a fillip to trading sentiment or volume. Stock price movement on the Budget day is ample indication that Budget provisions have left market cold.

Investors would be glad to bid adieu to a week that witnessed sharp stock price swings in both direction.

The Sensex touched an intra-week peak of 18,040 in the first two sessions buoyed by CRR cut and benign global cues.

The RBI's monetary policy statement, however, deflated sentiment, sending prices scuttling lower.

Volumes in the cash market were high through the week. Derivative volumes were low barring Friday when it crossed Rs 2 lakh.

Foreign institutional investors were net buyers in the Indian market through the week.

Now that the annual Budget jamboree is done, it is time to carry on business as usual.

Sensex (17,466.2)

The Budget has wrought no change in the medium-term trajectory of the Sensex. This trend is up since the trough at 15,135 formed on December 20.

We need the index to record a strong close below 17,200 to indicate that this trend is reversing. The index can then decline further to 16,830 or 16,430.

But if the Sensex manages to hold above 17,000 in the upcoming weeks, it will imply that the index is pausing before moving higher to 19,000 or above. We will retain a positive medium-term outlook as long as the index trades above 16,400.

If we step back and look at the long-term trend, the direction continues to be indeterminate.

A long-term correction is in progress since November 2010. This correction has retraced 45 per cent of the uptrend from 2009 low.

That means that a long-term bottom could have been formed at the recent low at 15,135.

That said only a die-hard optimist will expect a runaway rally given the current conditions.

Medium-term up trends will face resistance at 18,150 or 18,826. Rallies halting at these levels will result in the index moving in a broad trading range between 15,000 and 19,000 for few months.

The view is similar for short-term time frames as well - ambivalent. Movement in either direction is possible in the week ahead.

Rallies will face first hurdle around 18,000. Reversal from here will drag the index down to 17,426 or 17,000 again. Target on move above 18,000 is 18,426 and 18,523.

Short-term support for the Sensex lies at 17,386. Break below will take it lower to 17,104 or 17,004.

Medium-term trend in the Nifty (5,317.9) too is up since the trough formed at 4,531. The index needs to record a strong close below 5,200 to signal that the medium-term view can deteriorate and the index can slide lower to 5,080 or 4,950.

If the index manages to hold above 5,200, it will mean that the second wave from December trough is in motion with the possibility of the third wave breaking higher to 5,850 in the months ahead.

Our medium-term view will turn negative only if the index goes on to close below 4,950.

Long-term trend in the Nifty is sideways. The correction from 6,335 peak halted after the index had retraced 47 per cent of the previous long-term uptrend.

It is possible that a long-term bottom was formed at this level. However rallies will face resistance around 5,650.

Inability to move beyond this level will result in the index moving in a wide trading band between 4,500 and 5,630 in the months ahead.

The Nifty halted Friday's slide at short-term support at 5,296.

It is possible that the index reverses higher from here to move on to 5,508 or 5,634.

Fresh short positions can be initiated if the index moves below 5,295. Subsequent targets are 5,216 and then 5,041.

Global Cues

Global markets had a strong week with European benchmarks such as the CAC, DAX and the FTSE recording strong break-outs.

CBOE Volatility Index declined to the low of 13.6 that is the lowest recorded since June 2007.

The Dow put up a strong showing last week, breaking past the 13,000 barrier to close at 13,232.

As we have been reiterating, strong break above this level implies that the structural uptrend from the March 2009 low has resumed.

Minimum target for this move is 14,364. October 2007 peak at 14,198 will also act as a hurdle in the months ahead.

The positive medium-term view will turn negative only if the index goes on to close below 12,200.

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