The week ahead in the stock market promises edge of the seat excitement. Stocks will react to the monetary policy meeting on Tuesday, an early derivative expiry on Wednesday and the flood of quarterly earnings that will swamp market through the truncated week.

Investors appear content with the corporate earnings announced so far and the share buyback announced by Reliance Industries received a thumping response. Foreign investors ploughing in money in to secondary market, drop in headline inflation and a benign global equity market were other supporting factors that led the Sensex to add 584 points. The Nifty has also clawed its way above the 5,000 mark.

Volumes were brisk, especially towards weekend. The FIIs were net buyers last week and they have bought over $1 billion worth of shares in 2012. Open interest has crept higher to Rs 1,40,000 crore in line with increase in stock prices. High index put call ratio however implies that more traders are tilting towards the view that the current rally will not sustain.

This pile up of short positions is conducive for the short-term. The rally can accelerate if the bears get caught on the wrong side begin squaring their positions. Things can get sticky in global markets if the ongoing talks to restructure Greece' debt ends in a stalemate.

Oscillators in the daily chart continue to be gung-ho. The Sensex and the Nifty moved above their 50-day moving averages last week. The 21-day moving average is on the verge of crossing above the 50 DMA. Such crossover will be good for the near-term prospects.

Formation of ‘three white soldiers' candlestick pattern in the weekly candlestick chart is also something to feel pleased about. Since this is on weekly chart it has positive connotation for the medium-term trend. The 200 DMA at 5,226 in the Nifty and 17,430 in the Sensex is the next milestone that everyone will watch.

Sensex (16,739)

The Sensex moved to the intra-week high of 16,788 on Friday. This is close to the key short-term hurdle around 16,850 that we were targeting. The formation of the hanging man doji on Friday also shows fatigue. The index could slide down in the near-term to 16,156 or 15,961 or 15,766.

The zone around 16,000 will turn in to critical short-term support since both the 50 and 21 DMAs are poised there. Plus the psychological importance of the 16K mark will lend support. Short-term view will be in jeopardy only if this level is breached strongly.

If the index manages to move higher early next week, it will face initial hurdle around 17,000. A bout of vertigo is likely as the index reaches this mark. If it squeezes past this level, 17,430 and 17,908 will be the next targets.

The Sensex is continuing to move higher against all odds. As we have been reiterating, the higher it goes, the downward risk reduces by similar magnitude. Critical resistance from the medium-term perspective stays between 17,500 and 17,900. While the inability to cross this level will imply that the index will remain range-bound in the ensuing months, move above this level will mitigate the risk of another plunge below 15,000.

The Nifty (5,048.6) carried on merrily last week moving to our outer target at 5,023. As explained last week, the index faces strong resistance in the band between 5,000 and 5,100 and traders holding long positions should be wary as long as this zone is not surpassed.

The doji pattern formed on Friday also means that the index is having trouble moving higher from these levels. If there is some slackness early next week, the index can decline to 4,882 or 4,770. Traders can buy in declines with stop at 4,870. Decline below the second support will mean that the index is heading towards 4,588 or even 4,531.

If the Nifty surprises us again next week and starts with a bang, the upper targets will be 5,099, 5,169 and 5,220.

Key medium-term hurdle is in the band between 5,200 and 5,400. Inability to move above this level will result in the index moving in a broad trading range between 4,500 and 5,400 over the ensuing months. Move above this level will make the chances of a decline below 4,500 poor.

Global indices

Global markets continued their up-move last week despite lingering worries on Greece's sovereign debt. Many of the major indices closed the week 4-5 per cent higher. The DJ Euro STOXX 50 closed about 4 per cent higher indicating that investors are willing to bet that their woes will end soon.

The CBOE volatility index finally moved below 20 to close the week at 18.3. This shows the confidence in US equity investors about the sustainability of this rally. As mentioned earlier movement between 10 and 20 means that a bull market is in progress.

The Dow put up a stellar show last week gaining 298 points. It is now fairly obvious that it will test the previous peak at 12,876 soon. It is to be seen if this level is breached this time.

If it does, then the long-term uptrend from the March 2009 will resume giving the index the minimum target of 14,363.

This will take the index to its previous life-time high.

That said the more likely scenario is that Dow reverses down from the 12,900 to 13,000 zone and spends few more months in the zone between 10,400 and 13,000.

This will give time for the uncertainties in Europe to resolve itself.

Another important development for emerging market equities is the sharp fall in dollar index.

This means that risk aversion is on the wane and money is beginning to move out of the safe havens.

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