Technical Analysis

Index outlook: Stocks near a roadblock

Lokeshwarri S K | Updated on March 12, 2018 Published on September 15, 2012
The first half of the Budget session was slated to end on March 20. File Photo

Investors had much to cheer with the Government at its benevolent best.   -  The Hindu



It was party-time on Dalal Street with the Sensex skyrocketing beyond 18,000 and the Nifty above the 5,450-mark last week. Investors had much to cheer with the Government at its benevolent best (from a stock market perspective), first hiking diesel prices and capping LPG subsidies, and then announcing a slew of measures including hike in FDI limits in various sectors and divestment of four PSUs.

The Federal Reserve matched the Union Government’s mood by announcing QE3, making almost all asset classes levitate in ecstasy. Investors in India chose to pooh-pooh weak industrial production for July, head-line inflation reading at higher-than-expected 7.55 per cent in August, and slowing exports.

Volumes were subdued through the week but zoomed higher on Friday as stock prices whizzed up. It is obvious that short-covering contributed considerably to pulling stock prices higher. FIIs supported stock prices through the week by remaining net buyers.

Needless to say, the oscillators in the daily chart have moved well into the overbought zone. What is more heartening is that weekly oscillators have moved into the bullish zone.

Monthly rate of change oscillator has moved above the zero line following prolonged positive divergence since last August. These are bullish signs, but we need to keep in mind that the rally needs to sustain for few more weeks to signal a reversal in the long-term down-trend.

Since stocks could not react to the policy changes announced on Friday evening, there could be pockets of high activity on Monday morning. The Reserve Bank of India’s mid-term monetary policy on Monday will add to the excitement in a holiday curtailed week.

Sensex (18,464.3)

The Sensex made a tentative beginning on Monday but began revving higher from Tuesday to close the week 714 points higher. With last week’s surge, our medium-term counts have also become clearer.

It is now obvious that the third part of a flat formation began from the low of 15,748 on June 8.

Targets of this wave were 17,842, 19,136 and 20,432.

But since the critical Fibonacci retracement, 61.8 per cent, occurs at 18,826, investors can watch out for medium term impediment in the zone between 18,800 and 19,150. Strong close beyond 19,200 will mean that our counts have to be revised.

If we drill down one level and look at the targets of the third minor from the 15,748 low, we arrive at the target of 17,761, 18,481 and 19,644.

The index has reached our medium-term target at 18,480. Since this coincides with the peak of 18,523 recorded in February, investors need to stay alert in the short term until the index records a strong close beyond 18,500. Then a run to the resistance zone between 18,800 and 19,200 will be on.

Short-term view will stay positive as long as the index trades above 18,000.

The gap formed on Friday too needs to stay open if this rally has to sustain. Medium-term trend deciding level is 17,450.

The Nifty (5,577.65) too took off on Friday to end the week 218 points higher. The third leg of the sideways move from December 2011 appears to be unfolding now. This move has the next target at 5,869.

But investors need to stay wary of the resistance at 5,645 that occurs at 61.8 per cent retracement of the prior down-move.

Since the January rally came to an end at 5,630, the entire zone between 5,600 and 5,650 has to be treated as a potential minefield.

If we consider the target of the third leg of the rally from 4,770 trough, we get the targets at 5,610 and then 5,967. In other words, the rally could halt between 5,600 and 5,650. If 5,650 is crossed, there could be fireworks.

Short-term supports will be at 5,446 and 5,357. Traders can hold their long positions as long as the index trades above the first support. Key medium-term support is at 5,275.

Global cues

Global benchmarks closed the week with strong gains. The CBOE volatility index declined to 13.5 before closing at 14.5. Stocks could, however, be getting a trifle over-heated. CNN’s fear and greed index hit the level of 94 implying that investors were in an extreme greed mode.

DJ Euro STOXX 50 is nearing a significant hurdle at 2,639. Strong move above this level would mean that this index is heading towards 3,000.

The Bernanke booster helped the Dow surge beyond the 13,300 level. Immediate targets for this wave are now 13,778 and 14,200. The 13,300 level will now turn into a support and the current rally will not be under threat unless the Dow records a strong close below this level.

The dollar index took a deep tumble, falling to the low of 78.6. Close below 80 is negative for this index as it means the onset of a medium-term decline that can extend to 77.3 or even lower.


Published on September 15, 2012
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