The Hindu Business Line : Index Outlook: Uptrend under threat

Bulls remained on the back foot right from the outset last week as fear of increase in policy rates and weakness in the global equity markets kept stock prices in check. Unwinding of long positions prior to expiry of January derivative contracts exacerbated the nervousness making prices nose-dive on Wednesday. The Sensex closed the week down 502 points.

With earnings season winding to a close, success of NTPC FPO will be the principal sentiment driver next week. Market breadth deteriorated significantly implying that the party in second and third rung stocks could be drawing to a close. The BSE Smallcap Index closed 5 per cent lower.

Liquidity could become a concern in the weeks ahead since FIIs withdrew over Rs 7,000 crore or $1.5 billion just last week alone. Open interest recorded a new high on Wednesday prior to the expiry day. February series opens on a heavy note with OI at Rs 93,000 crore. Churn in derivative segment is likely to add to the volatility in February.

The Sensex has corrected 10 per cent from its peak of 17,790 when it recorded the low of 15,982 last week. The magnitude of this decline is not large enough to send alarm bells ringing. It may be recalled that the index declined 15 per cent in the correction in June and July last year and 12 per cent last October and November.

Oscillators in the weekly chart are just entering the negative zone. The weakness needs to sustain at least for a week more for them to give outright sell signals. Daily oscillators are in oversold zone implying the possibility of a short-term bounce. Strong close below the 50-day moving average is a negative from a short-term perspective.

The Sensex declined briefly below the 16,000-mark but bounced to close the week at 16,357. The medium-term uptrend is under pressure and appears vulnerable, but it has not reversed lower yet. A close below 16,000 will cause a severe dent to the market psychology as well as its medium-term prospects.

Minimum targets for a medium-term correction if we consider simple Fibonacci retracement of the uptrend from March lows are 14,867 and 14,068.

The Sensex moved below our outermost short-term target at 16,270 to record an intra-week low of 15,982. Bulls need not lose heart as long as long as the index hovers around 16,270. A close below this level will however imply that the index is heading towards 15,330 where the 200-day moving average is also positioned.

Despite the rebound on Friday afternoon, short-term chart pattern suggests weakness. A running correction appears to be forming that can make the index move in a narrow range between 16,000 and 16,700 for a few sessions. Such a move will be followed by a decline to 15,554 or 15,330. The Sensex needs to move above 17,100 to mitigate the short-term weakness.

Nifty (4,882)

Nifty declined below our outermost target of 4,833 to record an intra-week low of 4,766 on Friday. That the index has closed above the key medium-term support at 4,833 implies that the bulls need not throw in the towel yet. The market is oversold from a short-term perspective but the extent and strength in the rebound will determine the medium-term trend.

Short-term chart pattern suggests that Nifty can remain in a range between 4,750 and 4,970 for a few sessions. Such a move has bearish connotations and can be followed by a decline to 4,637 or 4,607 where the 200-day moving average is positioned. The index needs to rally beyond 5,100 to mitigate the bearish short-term outlook. Traders still holding long positions are advised to exit around 4,970, 5,040 or 5,100.

The medium term trend is under threat but it continues to be up. If the current decline continues, minimum targets would be 4,478 or 4,251.

Global Cues

Most global indices extended their losses last week and closed between 2 to 4 per cent lower. CBOE volatility index initially declined towards 22 but perked up in the last two sessions as stock prices plunged lower.

Commodities took a step backward last week and the CRB index closed 3.5 per cent lower. That this index is reversing after retracing about 60 per cent of the 2008 fall implies that an intermediate term peak could have been formed in early January and commodities could go through a few more months of correction.

The Dow attempted to steady itself in the first three sessions but resumed its decline towards the weekend. The index has closed 3.5 per cent lower in January, its worst monthly loss since February 2009. The short-term trend in the index remains down. The index is halting above the key short-term support at 10,100. Short-term chart formation is bearish and a decline to 9,650 is likely for this index. The medium term trend will however reverse lower only on a close below this level, paving the way for decline to 9,100. — Lokeshwarri S. K.

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