Index Outlook: Market's mettle under test

Sensex (16,821.4)

The gloom enveloping the market last weekend dispersed as bulls charged forward on Monday morning aided by mild rally in other Asian markets. The Sensex surged 568 points in that session, boosted further by bears scurrying to cover their short positions. There were bevy of other reasons such as revival in monsoon, Anna Hazare drinking coconut water with honey, Ben Bernanke's reassurance that the Federal Reserve will do all it can to bolster US economy that contributed to the cheer last week.

That it is was a truncated week with many market participants winding up for the week on Tuesday afternoon could also have contributed to the benign atmosphere. Foreign institutional investors took their fingers off the sell button and were net buyers in all the three sessions. Domestic institutional investors were, however, circumspect and net sold in two of the sessions.

Open interest is extremely low, around Rs 1,14,000 crore implying that traders are not confident enough about the market trend to build positions. Increase in index put-call ratio denotes that the market could be getting overbought from a short-term perspective.

Stocks will struggle to hold on to their gains in the week ahead as renewed doubts on US recovery following Friday's jobs data will hamper stock prices in the early part of the week. Reading the RBI's mind is likely to be the prime occupation of domestic market players even as monsoon begins retreating.

The Sensex gained 972 points last week raising hopes of a short-term bottom at 15,765. The index has already gained almost 8 per cent from this low. Oscillators in the daily chart recovered from the oversold levels but they are poised on the verge of entering the bullish territory.

The weekly oscillators also perked up but their progress is relatively slower. The morning star formation in the weekly candlestick chart is however, a positive and if this pattern is strengthened by another strong week then we could be on the way to a more sustained recovery.

The inference from the oscillator study is that the rally has to progress a little further before the short-term view turns positive. Monthly oscillators continue to point lower and the monthly rate of change oscillator has just retreated in to the negative zone implying that the pain can extend for some more time.

We have been reiterating the significance of the support between 15,330 and 16,000 over the last few weeks. That this level occurs at 38.2 per cent retracement of the 2009-10 bull phase makes it very important from a long-term perspective. We do have a trough at 15,765 now, but we have to wait for a few more weeks to see if it remains un-violated.

The rally last week paused tantalisingly below the short-term trend deciding level of 17,000. If the close of the US market on Friday is anything to go by, a reversal is on the cards next week that pulls the Sensex down to 16,521 or 16,232. If the index rebounds from either of these levels, there will be hope of a move beyond 17,000 soon.

However breach of 16,232 will mean that the move from 19,131 is yet to complete and the index could move lower to 16,034, 15764 or 15,443 in the weeks ahead before the index stabilises.

Key resistance for the short-term continues to be at 17,050. If this level is crossed, the Sensex can move on to 17,448 or 17,845.

Nifty (5,040)

The Nifty too staged a remarkable turnaround last week, going on to close the week 292 points higher. But the index, in its typically capricious manner, has closed just below the key short-term trend decider at 5,100. We need the index to close above this level to signal that the short-term uptrend will extend to 5,230 or 5,350.

But the blood-bath on Wall Street on Friday implies that trading for the week will start on the back-foot. Initial halts can be at 4,962 or 4,870. Traders can initiate fresh longs on reversal from either of these levels. However, the short-term trend will turn negative on decline below 4,870. Subsequent targets are 4,824, 4,720 and 4,645.

Decline below 4,870 will mean that the down-move from 5,944-peak is yet to complete and the index could spend some time in the zone between 4,700 and 5,100 before a more sustainable recovery follows.

Supports on the chart on a decline below 4,720 are as indicated last week: the troughs formed in 2009 and 2010 at 4,692 and 4,538.

Global Cues

Global equity markets were positive at the outset of the week but most indices received a sharp set-back on Friday when US jobs data showed zero addition to employment in August, the weakest reading since September 2010, thus once again stoking fears of slow-down.

CBOE VIX declined to four-week low at 30, though it rose towards the end of the week as volatility spiked with the equity sell-off on Friday. Key short-term support for this index is at 28. Decline below this level will mean that the medium-term downtrend has resumed.

It was a disappointing show by the Dow last week. It rose to the intra-week peak of 11,717 that is 50 per cent retracement of the decline from the April 2011 peak. But it could not make any further headway and reversed strongly on Thursday, putting the short term trend in jeopardy. Support to watch out in the days ahead is at 11,000. If this level is breached, the index could head down to 10,600, 10,430 or 10,313 in the days ahead.

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