The Hindu Business Line : Index Outlook — Road-blocks ahead for Sensex

The festive mood spilled on to Indian bourses helping the Sensex scale the 17,000 peak last week despite sagging global markets. After better-than-expected economic reports propelled global equities higher from the March lows, it is now the turn of worse-than-expected reports to pull stock prices lower. Indian equities emerged unscathed from the correction last week thanks to the two interspersing holidays.

It is clearly the foreign institutional investors who are the perpetrators of this leg of the up-move. They have pumped in around Rs 12,600 crore in September in secondary market alone. Volumes were subdued in the derivatives segment. Open interest has, however, surged beyond Rs 90,000 crore implying that market participants are getting ready to usher in a pre-Diwali rally.

Sensex has been on a different plane last week defying the edginess in other markets. But there is a clear lack momentum in the short as well as medium-term time-frame. The 10-week rate of change is showing a strong negative divergence and this indicator dipped lower last week though Sensex closed higher. In the daily chart too the rate of change oscillator is showing a declining trend.

Investors should exercise some caution in the short-term since the Sensex has completed one sub-minor five-wave from the low of 14,684. There can be a mild decline to 16,492 next week followed by a sideways move between 16,500 and 17,200 for a few sessions. Such a move will be conducive to the ongoing up-trend and will imply that investors will get that final lunge to 17,400 or 17,900 near Diwali after all. The May 5, 2008 peak of 17,735 is also a potential medium-term target once the up-trend continues.

Decline below 16,492 will take the index to 16,058. Since the 16,000 mark has been very closely watched as a long-term barrier, a close below this level is needed to signal that a serious medium term down-trend is unfolding.

But it needs to be stressed here that though the Indian indices are still heading northward, cessation of the up-trend in other global indices can bring the rally to an abrupt end here too. Also, the intermediate term up-trend from the March lows in Sensex is nearing the final stages and can be followed by a protracted down-trend lasting a few months. So investors need to be very selective in picking stocks from here. Taking some money off the table would also be a good idea.

The week ahead can see the Sensex drift lower to 16,492, 16,350 or 16,058. As explained above fresh purchases should be avoided if the index declines below the first support. Resistances would be at 17,110 and 17,417.

Nifty (5,083.4)

Nifty recorded an intra-week peak of 5,110 and closed 124 points higher. The index moved beyond our first short-term target of 5,060. But some caution needs to be exercised in the short-term since a five-wave formation from 4,581 low appears to have been completed last week. There can be a mild correction to 4,907. Short-term traders can hold their longs as long as this level holds. Supports on a decline below 4,900 are 4,783 and 4,353. Reversal above 4,900 can take the index higher to 5,110 or 5,166.

The medium-term view for the index will stay positive unless it records a close below 4,900. We expect a range bound move between 4,900 and 5,200 for a few weeks before a deeper correction ensues.

Global Cues

A touch of vertigo made most global benchmarks end around 2 per cent lower. The decline was not strong enough to cause any consternation but the fact that the benchmark indices of developed markets have recorded two consecutive weekly declines for the first time since July implies that the correction could prolong this time around.

What is worth noting in last week’s trade is the behaviour of the CBOE Volatility index. It spiked to an intra-week peak of 29.5 before ending 11 per cent higher for the week. This is the highest weekly close for the index since the second week of July. This reflects that traders have turned cautious.

The Dow declined 177 points last week and it has already lost 5 per cent from the September 23 peak. Negative divergence in the weekly momentum indicators and daily oscillators declining in to negative zone imply that the decline can prolong. The index is halting at the support at 9,500 indicated last week. Following a minor pull-back, the decline can continue towards 9,262. But a recovery from here will imply that bulls continue to have the upper hand.

Most Asian indices closed in the red too. But there were few indices such as Brazil’s Bovespa, Jakarta Composite Index and Taiwan Weighted Index that closed in the green. — Lokeshwarri S.K.

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Index Outlook — Road-blocks ahead for Sensex