Index Outlook: Stocks sway to the global beat

There was pandemonium in financial markets last week with most asset classes, including currencies, gold, bonds and equity markets getting extremely volatile. The initial trigger for this turbulence was the strong US jobs data that re-kindled fears of an early rate hike by the Federal Reserve. This sent the dollar index to a 12-year high near the 100 mark, causing other currencies, including the rupee, to go into a tailspin.

Stock market participants were not too pleased at the rupee’s weakness. Foreign portfolio investors turned net sellers in equity last week and this sent the Sensex and the Nifty hurtling lower.

It is, however, too soon to conclude that a medium-term correction that pulls the benchmark indices 15-20 per cent lower is underway. But as we have been reiterating, our market has been on a breathless run since August 2013, with only mild dips of less than 10 per cent in the interim period. With prices of many stocks moving away from their intrinsic value, stock prices could halt to let earnings catch up.

The correction can be either a swift and sharp one — that causes prices to decline sharply in a very short period — or a relatively shallow one that drags on for many months. With India better placed than most other countries in terms of growth and currency stability, buying is likely to emerge at every decline, making a shallow correction more likely.

Crude is doing its bit to add to the jitters. The ephemeral rally since the beginning of February has fizzled out and prices are once again nearing the recent lows of $43.5. A decline to the 2009 low of $32-34 will be possible if supply continues to exert pressure on prices.

With the US market declining on Friday due to worries on corporate earnings, dollar surging to record highs and falling crude oil, stock and currency markets will open on a tentative note this week.

Economic data releases in India weren’t too cheerful. The consumer price inflation for February recording a year-on-year growth of 5.4 per cent against the index a year ago revived fears that the RBI could halt its rate cuts.

Industrial production numbers for January however, showed that there was some improvement in manufacturing activity. Exports lower by 15 per cent compared to last February is a cause for concern too.

The Sensex lost close to 1,000 points last week and ended on a weak note.

The week ahead: An evening star pattern is visible on the weekly chart of the Sensex. This is a reversal pattern. But we need to wait for confirmation from the next candle before concluding that a top has been formed.

Since the Sensex breached the first support mentioned last week of 28,683, the possibility of a break to a new high in the immediate future is bleak. The index also moved slightly below its 50-day moving average on Friday.

But we will watch for one more session to see if the decline continues. Upward reversal from these levels will face resistance at 29,112 and then at 29,422. Rally to either of these levels will be a good point to initiate fresh short positions.

That said, it is quite likely that the decline will continue in the early part of next week. The targets for this decline are 28,293 and 27,743. The recent trough at 28,044 will also provide support in a decline.

Medium-term trend: The medium-term trend continues to be up. But caution needs to be exercised at these levels as a major long-term wave is drawing to a close. A finish below 28,000 will be the first signal that the medium-term trend could be reversing lower. Downward targets will then be at 26,500 or 25,200.

The Nifty too formed an evening star formation in the weekly candle-stick chart last week.

The week ahead: The short-term trend in the Nifty is certainly down. But the index is halting close to the first support indicated in our last column. It is also perched near its 50-day moving average at 8,660.

Traders with short positions need to watch out for sudden reversal from these levels. Resistances will then be at 8,813 and 8,926. Reversal from either of these levels will provide an opportunity for traders to short the index.

Downward target on a break below 8,600 are 8,575 and 8407. The previous trough at 8,407 will also come in handy in supporting the index in a decline.

Medium-term trend: There is no alteration in the medium-term outlook. But as mentioned in the discussion under Sensex, it is best to be vigilant at these levels.

Most global markets retreated from higher levels last week as fears of a US interest rate hike pulled them lower. European benchmarks such as the CAC and the DAX however, made merry as the euro at 12-year low is expected to help their economies by making exports more competitive.

The DJ Euro STOXX 50 gained more than 1 per cent even as other benchmarks declined.

The Dow declined below the near-term support at 17,800 last week, but the next support at 17,500 is the more important one. The short-term view will turn adverse only on a decline below this level, paving the way for a decline to 17,100.

The dollar index closed above the 100 mark on Friday, at its intra-week high. This implies that the index could attempt to move to the key resistance at 101.7 now. If this level is breached, the index will be coasting along to 120.

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