Technical Analysis

Index outlook: Thus far, how much farther?

Lokeshwarri SK | Updated on March 12, 2018 Published on August 17, 2014

PO18_Index_outlook.eps

Key events: Progress of the monsoon; Price movement of crude oil; and Foreign investors’ activity.

The Nifty and the Sensex are again nearing their lifetime highs. Exercise caution as they could be near a medium-term peak

The Sensex and the Nifty, that were looking down a deep chasm, were pulled back to end the week up 3 per cent.

A lull in the ongoing conflict in various pockets across the globe and the fact that crude oil prices were not impacted by the conflict in West Asia made investors get back into the buying mode.

The recovery was aided by weak economic data from across the globe. Growth in the Euro area for the June quarter remained unchanged from the March quarter at 0.2 per cent.

Japanese economy contracted the most since 2011; industrial production in China was down and the US retail sales were weak. But these readings propped up equity prices on the assumption that the governments will have to keep up the monetary stimulus if growth continues to stall.

With frontline indices close to their previous peak, investors need to exercise caution.

With the earnings season not throwing too many positive surprises, investors will have to search hard to find value picks at this juncture.

Another reversal from the 26,000-26,500 band will mean that the index is going to bide its time in a sideways range for at least a few more weeks.

Economic readings in India were not too good. Consumer price inflation for June accelerated to 7.96 per cent, up from 7.46 per cent in the previous month. Growth in industrial production also moderated to 3.4 per cent from the 5 per cent growth in May.

Investors will be closely watching the monsoon and the quantum of deficit, now that the South-West monsoon is drawing to a close.

With the deficit for the season at 18 per cent so far, it is not going to be as bad as feared earlier. There is no clear indication of foreign investors’ preferences; they were net sellers in some sessions and buyers in others.

Cash turnover is lacklustre as many small investors have again burnt their fingers in smaller stocks. Derivative volumes, however, continued to be healthy.

Oscillators in the daily chart reversed higher last week, but they are yet to move above the neutral zone. This implies that the short-term trend has not yet reversed higher. The medium-term trend in the index continues to signal a sell, implying that this trend continues to be under threat.

Sensex (26,103.2)

The Sensex made a dogged effort to climb higher last week, finally managing to close above the 26,000 mark.

The week ahead: The Sensex is now headed for the previous peak at 26,300.

It is quite possible that the index stutters around this level and reverses lower. Downward targets will then be at 25,553 and 25,232. But if the index manages to move past 26,300, the next target will be at 26,640.

Medium-term trend: The Sensex seems to be charting a complex sideways pattern. If it struggles to move beyond 26,837, it will remain in the range between 25,000 and 26,500 for a few more weeks.

While this could be a consolidation before a breakout, there is an equally strong possibility of this being a distribution pattern, akin to a rounding top that precedes a deeper decline. As we have been writing earlier, the Sensex appears to be reaching the upper end of this leg of the medium-term uptrend and a deeper correction could be around the corner.

A strong close below 24,000 is however needed to confirm the medium-term reversal in the trend.

Nifty (7,791.7)

The Nifty too reversed from the key short-term support level and managed a strong rally over the week.

The week ahead: The index is now headed towards the previous peak of 7,841.

Traders ought to tread warily with their long positions around this level. Reversal from here can pull the index towards 7,633 or 7,540. But a move above 7,841 will imply that the index is heading towards 7,958. Its next strong resistance zone is between 7,950 and 8,000.

Medium-term trend: The medium-term view in the Nifty remains positive. But as we have been reiterating, the index is at a critical medium term resistance zone between 7,800 and 7,900.

Even if there is a break past this level, there could be a medium-term peak just ahead around 8,000. This could well mark the peak for this calendar.

Key medium term support for the index is at 7,100.

Global cues

It was a good week for global markets.

Most global indices managed to close the week in the green. European indices such as the CAC, DAX and the FTSE stabilised at lower levels.

DJ Euro STOXX 50 closed on a flat note after attempting to move higher in the early part of the week.

The Dow too made headway last week, closing 109 points higher. Short-term resistance for the index is at 16, 880. The inability to move above this level will mean that the index can recede in the coming sessions.

On the other hand, a move above 16,880 will take the Dow towards its recent peak at 17,133.

Asian indices such as the Malaysia’s PSE Composite, Jakarta Composite, Shanghai Composite Index and the Taiwan Weighted Index too closed the week on a strong note.

Published on August 17, 2014
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