Technical Analysis

Stocks look for a foothold

Lokeshwarri SK | Updated on January 23, 2018 Published on April 25, 2015


Benchmarks are poised just above their 200-day moving average — a long-term support

Both the Sensex and the Nifty are very tantalizingly poised just above a long-term support level. This adds zing to next week’s trading that is expected to be full of action thanks to the FOMC meeting scheduled in the early part of the week and the derivative expiry scheduled for Thursday.

But the overhand due to the demand for Minimum Alternate Tax raised on FPIs pulled market lower last week even as rest of the emerging markets put up a decent show.

Foreign investors have a reason to feel aggrieved over these demands, the first time since they started investing in the country more than two decades ago. Many of them were not paying tax on capital gains since they are not required to do so as per the double tax treaty that their country of residence has signed with the Indian government.

Others were not paying CGT since they do not have a permanent establishment in India and do not maintain books of accounts according to the Indian Companies Act. The Centre has now back-tracked and issued clarification that those FPIs that took shelter under tax treaties will not have to pay the MAT.

But this has not assuaged FPI sentiment as a large number of them are not using these tax treaties to avoid tax. It is clear that the FPIs are holding the government to ransom.

Since they control over 40 per cent of the free-float market capitalisation of Indian market, they have the potential to cause steep sell-offs.

That said, they might not really want to do that as the high impact cost in Indian market will affect their holdings, harming their interest.

The last word has not been written on this issue yet. The extent to which the government gives in-on this issue could affect sentiment next week, too.

A weak monsoon forecast by the met department and weak earnings from some of India Inc’s bellwethers too impacted stock price movement last week.

Indicators in the daily chart of the Sensex and the Nifty have turned quite weak, in line with the deteriorating short-term trend.

The Price ROC indicator is featuring at -5 and the moving average convergence divergence indicator is also signalling a sell.

The weekly oscillators too are sloping downwards recording successively lower peaks and troughs; implying that the medium-term trend lack momentum.

Weekly ROC indicator dipping in to the negative zone last week is also a cause for worry. This is the lowest level recorded by this indicator since August 2013.

Sensex (27,437.9)

The Sensex could not make any headway last week and closed below the 28,000 mark.

The week ahead: The Sensex breached both the supports last week and is currently positioned just above its 200-day moving average at around 27,500.

Since this is a significant medium-term support, a brief move below this should not be construed as a reversal. The index needs to close materially below this level for at least a couple of weeks before we can take it as a breach.

As discussed last week, this appears to be the third leg of the move that commenced from the peak at 30,025. Downward targets for this move are 27,377 and then 26,317.

The index has already achieved the first target. So watch out for a bounce. Next near-term supports are at 26,776 and then at 26,469. Key medium-term support for the Sensex is also around 26,000. Investors therefore need to look out for the region between 26,000 and 26,500 as the support zone if the fall continues next week.

Short-term resistances are at 28,000 and 28,430. Inability to move above the first hurdle will mean that there is more pain in the offing.

Nifty (8,305.2)

The Nifty could not move much above the opening level of 8,620 last week.

The week ahead: It declined below the supports indicated last week to halt above the 200-day moving average at 8,256. We are at a critical juncture from a medium-term view-point.

This is the third leg of the down move from 9119-peak. The targets of this leg are as indicated last week – 8,364 and 8,077. The index has already achieved the first target, so watch out for a bounce from here. The 200-day moving average is also a critical support for the index. Next supports are at 8,065 and 7,961. In other words, if the decline continues next week, you can watch out for the support in the zone between 7,950 and 8,100.

An important Fibonacci support is also available here. Resistances for the week are at 8,500 and 8,628. Inability to move above 8,500 will be the cue for traders to initiate fresh shorts. The negative view will mitigate on a strong close above 8,700.

Global cues

Global indices recovered some ground last week with emerging market indices rallying quite strongly. The CBOE volatility index declined to the lowest level this year as investor confidence in the developed market soared. CNN’s fear and greed index shows that market sentiment is veering towards greed in the US market.

The Dow Jones Industrial Average moved higher once more to close 253 points up. The index is moving in a narrow band between 17,500 and 18,500 over the last eight weeks. This denotes the possibility of a break above the upper boundary of this range. This view will be negated only on a close below 17,500.

Many Asian indices such as the KLSE composite, the Hang Seng, the Shanghai Composite and the Taiwan Weighted Index recorded strong gains last week.

Published on April 25, 2015
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