Index Outlook: Not out of the woods yet

The Federal Reserve bowed to markets’ wishes and left the rates unchanged. But that does not lend any cheer to the near-term prospects for the equity market. It would have been better had Janet Yellen gone ahead and made a 25 basis points rate hike. The uncertainty regarding “What will happen once Fed begins raising rates?” would have been addressed then.

True, there would have been a fall, but it would have been short-lived and the bounce that followed would have been more sustainable. Investors too would have had more clarity on the extent to which a FPI pull-out can hurt the equity market. By stating that further rate action will also hinge on ‘international developments’, Yellen has given a tacit encouragement to financial markets to keep the tantrums going.

The reaction of the US and European markets on Friday, with declines ranging from 1.5-3 per cent reflects investor pique at the Fed action. It is clear that investors would have preferred an end to this uncertainty rather than wait for another three months to understand the actual repercussion of a rate hike.

The action of foreign portfolio investors in the coming weeks needs to be watched carefully to give us cues about the future course of the market. They were net sellers in the secondary market through the week. Net sales in equity in September have however tapered to $537 million. This is much milder than the $2.5 billion sold in August.

Macro-data releases last week such as the inflation data made the demands for a rate-cut louder. With the next monetary policy meeting coming up soon, investors will start concentrating on that event.

The derivative expiry on Thursday will add to the volatility this week. Both the Sensex and the Nifty have moved around 6 per cent higher from recent lows and some turbulence could be in the offing. But the fact that indices are close to medium-term resistances makes it highly likely that a medium-term low will be in place soon.

How they oscillate Daily oscillators have moved into the positive zone and are also signalling a buy after the rally last week. But there is no change in the weekly oscillator implying that the medium-term trend continues to be down.

Monthly oscillators however continue to display weakness. The monthly ROC is poised on the zero line, on the verge of declining into the negative zone, for the first time since July 2012.

Nifty (7,981.9) The Nifty rose strongly on Friday to hit the intra week high of 8,055. But it closed the week below the 8,000 mark.

The week ahead:  The index moved to our outermost short-term target at 8,060 last week. As explained last week, this is the floor of the gap formed on August 24 and the index needs to record a strong close above this level to signal a reversal in the short-term down-trend.

The Nifty tested this level on Friday and closed much lower, denoting short-term weakness. Short-term traders can go short if the index fails to move beyond this level on Monday. Initial downward targets are 7,856 and 7,736.

Break below 7,736 can take the index lower to 7,539 again. Resistances for the index will continue at 8,060, 8,091 and 8,225. A strong rally above 8,200 will mean that the medium-term trend is reversing higher.

Medium term trend: The medium-term trend continues to be negative. The Nifty has now reached the short-term target at 8,060. Inability to move higher from here will mean that the index is heading lower towards 7,539 or 7,475.

We stay with the view that the index can bottom in the zone between 7,380 and 7,500. The outlook will deteriorate only on a strong move below 7,400.

Sensex (26,218.9 ) The Sensex too weakened after hitting the high at 26,471 on Friday.

The week ahead: The Sensex faces resistance at 26,687 and then at 26,730 in the coming week. If the index manages to get past the second resistance, rise to 27,000 or 27,131 will be possible.

Closing of the gap formed on August 24, with the help of a rally above 27,131 will be the first signal that the medium term trend in the index is reversing higher.

If the Sensex is unable to make any headway on Monday, it can slip to 25,860 or 25,500 in the coming sessions. Fresh purchases should be avoided on a close below 25,500, for the next target will be 24,851.

Key medium-tem support in the Sensex is around 24,500. The area between 24,500 and 25,500 is a strong support zone for the index and investors should start fretting only on a close below 24,500.

Global cues Global benchmarks gained some ground last week, despite volatile trade. The CBOE volatility index fell to an intra-week low of 17.9 before closing at 22.8, implying that investors continue to be edgy.

The Dow hit an intra-week high of 16,933 on Thursday, but the sharp decline on Friday has resulted in an evening star formation that does not bode well for the short-term.

The index now appears set to decline to 16,000. If this level is breached, a test of the previous low at 15,370 will be possible.

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