Index Outlook: Market poised at a critical hurdle

Stocks soared merrily last week as the headwinds created by the Greek debt crisis and China’s market crash eased.

The Sensex closed higher in four out of the five trading sessions, gaining 802 points. The Nifty too managed to close almost 249 points higher.

Equities across the globe moved higher, led by stocks in the European region. The CBOE volatility index, the investors’ fear gauge, declined almost 30 per cent, reflecting the relief of investors over resolution of the Greek stalemate.

But it is best to stay cautious this week. Both the Sensex and the Nifty have reached important resistances that occur at 61.8 per cent (Fibonacci number) retracement of the previous decline. A downward reversal from here can pull the Nifty towards the 8,000-level while the Sensex can dip to 26,000.

The bulls could also turn edgy if the first quarter earnings numbers do not show improvement in revenue and earnings. There could also be some turbulence in foreign fund flows as the Justice AP Shah committee is set to submit its report next week.

The committee will decide on the tax demands raised by the income tax department on capital gains made by FIIs in the previous years. The IT department has raised a series of tax demands since last December asking foreign investors to pay Minimum Alternate Tax (MAT) on capital gains made in the previous years.

It was so far believed that MAT was not applicable to foreign investors coming from jurisdictions that have signed double tax treaties with India.

If the ruling is not in favour of foreign investors, it can once again bring forth selling, pushing indices lower.

Monsoon’s progress has also been worrisome. Cumulative rainfall for the entire country received up to July 15 is 6 per cent lower than normal.

Rainfall has been normal in 20 sub-divisions whereas it was deficient in 12 and excess in four. If the next two weeks do not see revival in the monsoon, there could be trouble.

How they oscillate The Sensex and the Nifty continued oscillating around the long-term 200- day moving average. The indices soared above this average and have recorded a strong close above it.

But since this is a long-term indicator, we need to see the movement over the next couple of weeks before concluding that this is a break-out.

Momentum indicators in the daily chart continue to gain strength. The weekly oscillator is on the verge of moving into the positive zone.

Monthly oscillators are, however, still signalling a sell. In simple English, the medium-term trend is on the verge of turning positive, but the long-term view continues to be under a cloud.

Nifty (8,609.8) The Nifty closed strong with 249 points gain last week.

The week ahead: The index moved to the second resistance at 8,667 last week and is halting there currently. This is a critical level from a medium-term viewpoint. Short-term traders need to be agile with their strategies as the index could swing sharply in either direction.

Here are the guideposts for the coming week:

a) It is quite likely that the current up-move will come to an end at current levels. A 3-wave move from the 7,944-low appears to be complete at these levels. In this case, the index could slide lower to 8,518 or 8,442.

The key support to watch out for is at 8,400. A close below this level is needed to indicate that the index is heading towards 8,200 or 8,000.

b) If the Nifty manages a close above 8,650 early next week, it will mean that the index is heading towards 8,808 or 8,957.

Medium term trend: As mentioned above, a strong breakout next week will mean that the medium-term trend has turned positive. This will pave the way for another move towards the 9,000 mark.

It is highly unlikely that the index will be able to break above the 9,000 mark effectively just yet. A sideways move between 8,000 and 9,000 can then ensue in the coming months.

Sensex (28,463.3) The Sensex too closed with strong gains last week.

The week ahead: The Sensex has moved close to its key medium-term resistance at 28,600. Reversal from here will pull the index lower to 27,850 or 27,750 in the days ahead. The short-term trend will turn negative only if this level is breached.

If the index heads higher in the coming week, the targets are 29,094 and 29,351.

The medium-term trend will be decided by the index moves over the next couple of weeks.

Global cues Global benchmarks, led by the European indices, surged strongly higher last week. The DJ Euro STOXX 50 closed almost 4 per cent higher, helped by sharp rallies in the CAC, DAX, FTSE and the Greece General Share Index.

The Dow recovered from the short-term support at 17,538 to move smartly higher. The index could now attempt to move towards the previous peak of 18,351. Target on a move above the level of 18,350 is 18,780.

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