Index outlook: Market enters a rough patch

Stocks meandered in a lackadaisical manner in the early part of the week. Intra-day volatility was, however, high as investors tried to make up their minds about the direction in which stocks could now move.

Raghuram Rajan’s largesse on Wednesday in the form of a 25 basis points cut in the policy rate made market participants euphoric, taking the Sensex beyond 30,000 and Nifty above 9,000. But the steep sell-off witnessed from the intra day high recorded in that session implies that the uptrend lacks inherent strength.

There could be turbulence in stock markets, at least in the early part of next week.

The Dow Jones Industrial Average and the S&P 500 recorded sharp declines on Friday due to unemployment numbers in the US declining to seven-year low of 5.5 per cent.

This revived fears of the Federal Reserve hiking rates sooner than expected. US stocks that have been rallying over the last five years, buoyed by the easy money policy followed by the US central bank, now face the threat of losing steam.

The nervousness could spill over into other markets, including India, since it is the money pumped in by various central banks such as the European Central Bank, Bank of Japan and the Federal Reserve that are fuelling the global rally in stocks. With the Budget not offering any trigger to take stocks higher from here, there is a case for a correction from these levels. It is best to get your shopping list ready to make the most of such a decline.

The industrial production and consumer price inflation numbers slated for release next week will be of interest to market participants. The passage of the insurance Bill and the coal mines bill in the ongoing session of Parliament will also affect sentiment. The initial public offer of Adlabs Entertainment will be another sidelight to the trading next week.

Both cash as well as derivative volumes were tepid over the week. FPIs were net buyers in the equity market. Open interest in the derivative segment is not too alarming at ₹220,000 crore.

Momentum indicators in the daily chart are moving sideways in the neutral zone.

This implies that the short-term trend is ambivalent and a move in either direction is possible.

The negative divergence in the weekly charts remains a worry. The prices continue to hit new highs but the weekly price rate of change oscillator has been recording lower peaks and troughs since last July.

This means that the medium-term trend lacks strength and a correction is imminent.

The short-term trend has reversed since the peak of 30,024 recorded on Wednesday.

The week ahead:  An important peak might have been formed at 30,000 last week. Immediate supports for the Sensex are at 28,683 and then 28,000. If the index manages to hold above the first support, it will mean that the possibility of a break to a new high again remains open.

However, fresh long positions should be avoided below 28,000. Key short-term resistance stays at 30,024. Next target is at 30,171.

Medium-term trend:  We are at a critical juncture from a medium-term standpoint.

As we have been reiterating, the final leg of the up-move from the August 2013-low is unfolding in to a diagonal triangle. This triangle is in its final stages.

Move beyond 30,200 in the coming weeks makes a rally to 30,900 or 31,419 possible. But if the index declines below 28,000, a medium-term correction that can pull the index to 26,500 or 25,200 will be on.

The Nifty went briefly above the 9,000 level to hit the high of 9,119 before reversing lower.

The week ahead:  The short-term trend in the Nifty has reversed lower from the peak of 9,119. Immediate supports for the index are at 8,719 and then at 8,466.

Short-term traders can buy stocks as long as the index trades above the first support. The short-term trend will reverse only on a close below 8,466.

The 50-day moving average at 8,623 will also be an important short-term support for the index.

Key short-term resistance for Nifty lies at 9,119.

Medium-term trend:   The medium-term trend in the Nifty continues to be up. But the final part of the move from the August 2013 low appears to be unfolding into a diagonal triangle pattern. The final part of this move could be in motion now.

If the index struggles to move beyond 9,100 in the coming weeks, it will mean that it is readying for a decline to 7,500 or lower.

Global equity markets continued moving higher last week. But the setback to North American equities towards the end of the week pulled these benchmarks lower.

The CBOE volatility index moved up from the low of 12.8 as nervousness surged following the sell-off. The Dow too turned jittery as it closed in on the 18,000 level. Immediate supports for the index are at 17,800 and then at 17,500. It is currently halting at the first support.

Reversal above this level will take the index to a new high. The short-term view will turn negative only on a close below 17,500.

The sharp surge in the dollar index to 97.6 on Friday does not bode well for the rupee. Next target for the index is 101.7. If this level is breached, the index can head towards 120.

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