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There was a global rout in the equity markets on Friday as investors stampeded towards the exit door. Higher unemployment in the US, contracting growth in India and China and a wobbling Euro zone gave equity investors no place to hide, They decided to dump equity altogether and move into the safety of US treasury instrument.
There was plenty happening in the forex market too with the euro sliding below the key support at 1.26 against the dollar. The dollar index closed higher for the fifth consecutive week, gaining 6 per cent in the past month. The other safe-haven, gold too shot up on Friday as risk-aversion surged. Gold prices gained 4 per cent on Friday to close at $1,625.
Amidst the turmoil in the global arena, Indian equity had to additionally grapple with lower domestic GDP growth, widening current account deficit and the rupee volatility. The Sensex held its ground until Thursday but gave way towards the weekend to end the week 253 points lower.
Volumes spiked on Thursday, the day of the derivatives expiry but it was sedate over the rest of the week. Surprisingly, FIIs were net buyers in some of the sessions, according to data put out by SEBI. Derivative expiry was relatively calm.
There could be intense volatility next week as global turbulence takes its toll on the rupee. The Indian currency could test its recent low of 56.5 against the dollar which, in turn, will affect stock prices. A decisive close below the psychological 16,000 mark will also exacerbate the weakness.
But we stay with the view that any weakness in the upcoming weeks should be viewed as an opportunity to accumulate blue-chips by long-term investors. Traders can anyway make the most of the volatility by playing short.
Momentum indicators in the daily chart declined into the negative region. Weekly oscillators are dipping but many are continuing to diverge positively. The month of May has lived up to its dreaded reputation with the Sensex declining 9 per cent in the month. The index has also breached its long-term 200 day moving average and is currently trading well below it.
Sensex (15,965.1)
The Sensex recorded the intra-week peak of 16,544.4 and then reversed lower last week. If we consider the third wave down from the 21,108 peak, we get the targets at 14,831 and then 12,550 for the index. As explained earlier, since the first target occurs close to the previous low at 15,135 recorded in December, this level could cushion the index if the down-move accelerates.
If we consider the retracements of the up-move from March 2009 low, we get the 50 per cent retracement at 14,577 and the 61.8 per cent retracement at 13,036. These retracement supports also roughly coincide with the wave targets obtained above. So we can first look out for the support in the band between 14,500 and 15,000. If this level is breached, the index can head to the long-term support band between 12,500 and 13,000.
The Sensex closed slightly below the 16,000 mark on Friday. It could move down to 15,903, 15,507, 15,135 or 15,051 in the week ahead. Resistances will be at 16,320, 16,544 or 16,865. The index needs to close above 16,865 to indicate that the worst is over for the near-term.
Nifty (4,841.6)
The Nifty hit the peak of 5,020 before reversing lower last week. Long-term target of the third wave down from the 6,338 peak gives us the targets of 4,512 and 3,822. Fibonacci retracement of the up-move from March 2009 low gives us the targets of 4,455 and then 4,000.
That gives us the two support bands between 4,450 and 4,520 and between 3,820 and 4,000 if things deteriorate further. The index needs a close above 5,115 to indicate that the medium-term trend has reversed higher. Else, volatility can continue.
The start to next week could be on a turbulent note and the Nifty could decline to 4,821, 4,698 and 4,557 in the near-term. Resistances will be at 4,950 and 5,020. Traders can initiate fresh short positions if the Nifty fails to move above 4,950 in the early part of the week.
Global Cues
Global indices traded lower levels for the most part but lost considerable ground towards the weekend. The US added only 69,000 jobs in May and the unemployment rate moved higher for the first time in the last one year. This made the CBOE Volatility index move to the highest level since last December. This index is now poised at the critical medium-term resistance at 27. Any further rally will mean that investors have become nervous and there could be further decline in the offing.
The Dow has moved into negative zone for the year and it also closed below its critical medium-term support at 12,200. Close near the lowest point of the week implies that the index can now decline further to 11,867 or 11,500 in the upcoming weeks. The medium-term view will turn negative only on close below the second support. That will open the possibility of a decline to the October low of 10,404.
Some of the Asian benchmarks such as KLSE Composite Index, Seoul Composite Index and Philippines Composite Index displayed surprising strength and closed higher for the week.
> lokeshwarri_sk@thehindu.co.in
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