Technical Analysis

Index Outlook: Rough road to derivative expiry

Lokeshwarri SK | Updated on January 23, 2018 Published on May 23, 2015

Index

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Stock prices can turn volatile again due to the derivative expiry on Thursday

Bulls fought valiantly last week to pull the indices back from the edge of the precipice. But the action, similar to a nail-biting action sequence in a Hindi potboiler, is set to continue next week. The bears may manage to regain vigour in the twilight zone of the derivative expiry week, sending bulls tottering once again.

The winds in the capital market changed as rain clouds gathered over the Andaman and Nicobar islands last week. This helped dispel the sense of gloom over the economy, currency, corporate earnings et al and made investors look at the brighter side — declining inflation, interest rates, signs of revival in infra projects, consumption, etc.

The benchmark indices have managed to close above their 200-day moving average. But they are not out of the woods yet as they are still trading below important short-term hurdles.

The battle between those holding long and short positions will intensify next week, ahead of the expiry; stocks may also gyrate violently in either direction.

As the new government completes one year in office, this week will be spent introspecting on what it has achieved and what it needs to focus on in the coming years. It appears to be on the right path towards fiscal consolidation, financial inclusion, spurring foreign capital inflows and reviving infrastructure. Ability to build political consensus on key bills and regulations will be the key to spurring the economy.

The US market turned nervous on Friday with Janet Yellen reiterating that an interest rate hike in 2015 is inevitable. This will make rest of the global equity markets nervous on Monday. Bond markets could also see the return of nervousness.

Foreign portfolio investors have gone slow with their selling in Indian equity. They have been net purchasers over the last couple of weeks, bringing down the net outflow from the equity market to less than $1 billion in May.

The tally for the entire 2015 remains at $6.8 billion. Retail investors appear to be staying away from the market, considering the cash volumes on the NSE.

Investors will now turn their attention to the RBI’s next move in the monetary policy scheduled on June 2. Rest of corporate earnings and the progress of monsoon will be other factors that investors will watch out for.

Sensex (27,957.5)

The Sensex reversed smartly last week, forming a morning star pattern in the weekly chart. This is a bottom reversal pattern, but has to be confirmed by the next candle. The sharp turnaround in the weekly oscillators is also heartening as it means that the index is garnering strength.

The week ahead: In the short term however, there was a slackening of momentum over the last three sessions, implying that there could be a minor decline this week.

The Sensex is poised just below its 50-day moving average line. The resistances are now at 28,236 and 28,664.

But reversal from the current level can drag the index down to 27,640, 27,500 or 27,078. The short-term view will deteriorate only on a close below 27,000.

Medium-term trend: There is no change in our medium-term view. The index has completed a 3-wave move down from 30,024. The extent of this reversal will determine the medium-term trajectory.

a) A strong close above 28,664 is required to signal the end of this correction and the possible move to a new high.

b) Reversal from the current levels will keep open the possibility of a decline, first to 26,300 and then to 25,700 or 25,200.

Nifty (8,458.9)

The Nifty too has a morning star reversal pattern in the weekly chart and there is a discernable improvement in the weekly momentum indicators.

The week ahead: The Nifty managed to move past the resistance at 8,323 and has closed well above it. It is now poised at the next hurdle indicated last week — 8,434. This is an important level to determine the short-term view as the 50-day moving average is also present just above this level.

These are the guideposts for the coming week,

a) Volatility is likely to emerge in the early part of the week as there is a slowdown in daily momentum. Short-term targets in this case will be 8,300 and 8,180. Short-term trades should hold their long positions only as long as the first target holds.

b) Move below 8,180 will mean another decline to 8,057 or maybe lower to 7,806.

c) However, if the index manages to hold above 8,300, it will imply the intention to move on to 8,560 or 8,700.

The short-term view will turn positive only on a close above this level.

Global cues

Global benchmarks managed to move higher last week. But the sell-off on Friday caused a dent in the indices of American markets. The CBOE volatility index continues at multi-year lows indicating that investors in the US continue to be sanguine.

The Dow hit a record high of 18,351 but closed the week down 40 points.

The index is still stuck in the range of 17,600 and 18,300 and a strong move beyond 18,500 is needed to assume that the index has broken out. The next target stays at 18,830.

The Shanghai Composite Index was up, up and away, gaining 8 per cent last week. The index has also broken past the long-term resistance 4,438.

If it sustains above 4,500, next targets will be 5,500 and eventually 6,000.

Published on May 23, 2015
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