Sunday, October 18, 2015

Index Outlook: Market wavers below key hurdle

The entire country is in a festive swirl as we begin a truncated week for the equity market. In the past, such periods were marked by a sideways moving market with low volumes. But now, with foreign investors dominating the trading, such festive stupour is hard to come by.

The pendulum has swung from extreme pessimism a month ago to extreme optimism now. Investors appear to be in a denial phase, betting that the worst is over, as far as Chinese slow-down and the metal price rout go. This shift in sentiment can be gauged from the kind of assets that were bought last week.

In Indian equity market, while the Sensex gained half per cent, investors flocked to the riskier mid and small cap stocks making the BSE Midcap and BSE Smallcap indices gain over one per cent.

Global investors too chased risky assets and the impact was felt on Indian debt. FPIs purchased more than $2 billion worth of debt securities in the first four sessions of last week. In the US, purchase of junk bonds is reported to have hit eight month high.

This bravado might however not last too long. Quarterly earnings releases are likely to throw a dampener on the proceedings. Macro data releases last week were far from cheery. Consumer price inflation grew 4.1 per cent in September, up from 3.9 per cent in August. WPI inflation was a negative 4.95 per cent. The deceleration in WPI is not good news for India inc as it means that realisations are heading lower. Industrial production growth was 6.4 per cent in August, but the fact that this growth was led by just two sectors belie these numbers. Deceleration in merchandise exports is another cause for worry. Exports for September declined 24.3 per cent; tenth straight month of decline. This blunted the benefit of falling imports.

Nifty (8,238.1)

The Nifty made no headway and closed with mild gains. This keeps the uncertainty going on the current rally.

The week ahead: Daily oscillators are looking up again due to the brief surge towards the later part of the week. The weekly oscillators too are showing signs of bottoming.

Short-term trend continues to be positive, if we follow trend-following methods. The formation of a higher bottom at 8,088 is a positive too. As explained last week, third part of the wave from 7,539 low has the targets of 8,207 and 8,404. The Nifty is pausing around the first target and it can also terminate here.

But if it manages to move higher, 8,400 will be the next test for the Nifty. This is another formidable hurdle due to convergence of resistances here:
  • 200 day simple moving average,
  • ceiling of the first gap formed on August 20 and
  • the next wave target.

Downward reversal from the current level can drag the index to 8,060 or 7,966. Short-term investors can buy in declines as long as the second support holds. Decline below 7,966 can drag the Nifty to 7,886 or 7,800.

Medium-term trend: The medium-term outlook stays bearish. But positive signs emerging in weekly oscillators mean that the outlook can turn positive if the index manages to move higher from these levels.

Key resistance zone for the Nifty from a medium-term perspective is between 8,500 and 8,650. Move above that zone will mean that the index can move to its previous high once again. The support that is critical for the medium term is at 7,800. Investors need not worry as long as this level holds.

Sensex (27,214.6)

The Sensex too closed the week with minor gains after much gyrations, resulting in a hanging man pattern in the weekly chart.

The week ahead: The formation of a higher bottom at 26,713 implies that the uptrend from the 24,833 -low continues to be in force. Targets of the third part of this move are 27,000 or 27,525. The index is now oscillating in the zone between these two levels. Immediate targets are 27,525, 27,564 and 27,670.

In other words, the entire area between 27,500 and 27,700 is a formidable resistance zone. If this zone is crossed, the next important hurdle will be at 28,000. The medium-term view for Sensex will turn positive once it gets past 28,000. That will signal that the path is clear for a rally towards the previous peak of 30,024. Supports for the Sensex are at 26,720 and 26,370. Short-term investors can buy in declines as long as the index trades above the second support. Targets on a breach of this level are 26,078 and 25,772.

Bank Nifty (17,912)

The CNX Bank index was also quite volatile, dipping to 17,434 before rallying to close above 17,900. If we extrapolate the move from 15,762, we get the targets of 17,816 and 18,538. Since the index is just beyond the first target, another spurt can take it towards the next target.

Fibonacci retracement targets give us the next resistances at 18,328 and 18,944. Traders can be long till the index trades above 17,400. Subsequent supports are at 16,990 and 16,955.

Global cues

Global indices were volatile last week. The CBOE volatility index moved lower to close at 15. This reflects the sanguine mood among US investors. The DJ Euro STOXX 50 hit the intra-week low at 3,178 before ending at 3,264.

The Dow managed to move a little higher. It is however just below the key resistance at 17,260. This occurs at the 61.8 per cent retracement of the previous down-move. The index could struggle to get past the band between 17,250 and 17,500.

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