Technical Analysis

Index outlook: Stocks on a slippery slope

Lokeshwarri SK | Updated on January 23, 2018 Published on May 02, 2015

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Indices have breached their long-term average. But buying can occur at lower levels



We have entered May, the month in which the stock market is at its quirkiest, either giving outsized gains (May 2009, 2014) or terrible losses (May 2004, 2006). Unfortunately, the Indian market is appearing quite vulnerable at the outset of this tricky period.

The week that went by was quite adverse for the market trend for various reasons. It made both the Sensex and the Nifty close below their long-term 200-day moving average lines. The Sensex and the Nifty are now down more than 10 per cent from their recent peaks, this is the deepest decline seen since the Modi-rally began in August 2013. Finally, weekly momentum indicators have declined deep into the negative zone, reaching levels last recorded in 2013.

As we have explained earlier, these are long-term reversal signals and they need to sustain for a couple of weeks to confirm a reversal. It is thus best not to press the panic button immediately. As we all know, the market can be quite whimsical.

The ongoing skirmish with foreign investors and the expiry of the April derivative contracts took stock prices lower last week. It was the FOMC meeting that dictated the movement of global markets during this period. Investors were nervous ahead of the meeting, but the Fed dropping all references to time in its policy statement lent hope that a June rate hike had probably been staved off to September or later.

Though there was gloom in global markets for most part of last week, the US markets recovered smartly on Friday as many traders holding short positions seem to have booked profits. Bargain hunting also appears to have emerged, given that earnings of S&P companies have not been as dismal as expected earlier.

Investors will turn their attention to corporate earnings in the absence of any other trigger in the near term. Progress of the monsoon, the FPIs’ ongoing tussle with the Income Tax Department and the rupee will be other interesting sidelights this week.

Sensex (27,011.3)

The Sensex continued sliding and closed below its 200-DMA last week.

The week ahead: The deterioration in the momentum indicators on the weekly chart is a cause for worry. The price rate of change oscillator in the weekly chart is at a level last seen in May 2012. It also needs to be seen if the index is able to move above the 200-day moving average at 27,506 in the week ahead. Next short-term resistances are at 27,760 and 28,280.

If any rally fizzles out under 27,760, it will imply that the index is heading towards 26,776, 26,469 and 26,317.

Medium-term trend: It is obvious that a medium-term downtrend is currently in progress. The third leg of the down-move from the 30,024 peak gives us the next targets of 26,317 and 25,257.

If we consider the retracement targets for the move from August 2013, we get supports at 26,200 and then at 25,215.

If we converge the two, we get the first target at around 26,200. Further decline will pull the index to 25,200 levels.

The bearishness will be mitigated if the index records an emphatic close above 27,500.

Nifty (8,181.5)

The Nifty too has been slipping and sliding over the last week.

The week ahead: The index has closed well below its 200-DMA last week. This is the first hurdle that traders should watch out for.

There is a possibility of a rebound next week that will take the index higher to 8,418 or 8,584. If the rally fizzles out under 8,418, it will imply that bears continue to have the upper hand. In such an event, fresh short positions can be initiated. Downward targets will then be 8,077, 8,065 and 7,961.

In other words, watch out for some struggle around the 8,000 level, if the decline continues.

Medium-term trend: It is now obvious that the index is correcting the entire move that began from the August 2013 lows. If we extrapolate the move that began at the 9,119-peak, we get the targets of 7,994 and then 7,670.

Retracement of waves and sub-waves since 2013 also gives us supports at around 7,900 and then 7,600. The medium-term view will turn positive only on a strong close above 8,740.

Global cues

With the first four months of 2015 behind us, global equity markets do not have much to show by way of returns. The top performing index in this period was Venezuela’s benchmark that gained 49.4 per cent. Shanghai Composite, the cynosure of all investors’ eyes so far this year, is up 37 per cent. European indices such as FTSE, CAC and DAX have gained between 7 to 12 per cent thanks to a weak Euro.

The US indices have put up an indifferent performance with the S&P 500 gaining 2.4 per cent and the Dow 1.1 per cent.

The Indian market has been one of the worst performers in this period with the Sensex losing 2.4 per cent between January and April.

Most global indices did not lose much ground in the week that went by. The CBOE volatility index continues to trade at around 12, reflecting investor complacency.

The Dow continued moving in a narrow trading range that has kept it shackled since the beginning of March. Targets on a break above 18,300 are 18,547 and 19,025. Near-term view will get negated only on a close below 17,500.

Surprisingly, many of the Asian emerging markets, such as Indonesia, Malaysia, Philippines and Thailand recorded a sell-off last week.

Published on May 02, 2015
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