Sunday, February 21, 2016

Index outlook: Action-packed week ahead

The Sensex and the Nifty closed the week more than 3 per cent higher; the best weekly close so far this year. This sets the stage for one of the most-awaited events of the year — the Union Budget — that will be announced on February 29.

With the derivative expiry scheduled this Thursday, volatility is likely to be high as traders try to decide if they want to roll-over their positions. Nifty put-call ratio at 0.79 indicates that the market is oversold now, and puts are being unwound. Outstanding derivative position is also not too large at Rs.2,39,000 crore, implying that not too many traders want to bet on the Budget this year.

That is probably a wise thing to do as there is likely to be disappointment if the fiscal deficit target for FY17 is relaxed too much. It will not go down well with rating agencies or foreign investors. Foreign investors would also be looking for some palliatives in the form of postponement off the General Anti Avoidance Rules (GAAR) deadline or further clarity on the MAT issue.

The nervousness regarding the Budget was evident in the way market turned volatile last week on rumours that the Centre was considering pushing the time limit for applicability of capital gains tax to three years.

Given the shaky sentiment after the deep cut received since the beginning of this calendar, the market’s reaction to any negative proposal can be quite violent. It would therefore be best to decide on your investment strategy after the Budget.

Actions of the foreign portfolio investors will be important in determining the market moves over the next few weeks. They continue to be net sellers in Indian stock markets. But their selling in February so far has been quite mild. They have pulled out stocks worth $661 million in February and net sales of debt equals $12 million.

In the year to date, they have net sold stocks worth $2.3 billion while they have net purchased Indian debt instruments worth $335 million.

The movement of the rupee will also impact sentiment next week. The Indian currency is edging close to its life-time low of 68.8 against the dollar; it hit a low of 68.6 last week. A fresh low will once more cause nervousness. The currency has been in a gentle decline for some time now; losing 8 per cent since the beginning of 2015. It has been far less volatile when compared with other emerging market currencies such as the real or the rouble, but since currency movement affects foreign portfolio flows, decline to fresh lows can make some money move out of stocks.

Nifty 50 (7,210.7)

The Nifty hit the intra-week low of 6,960 and closed 229 points higher.

The week ahead: Extreme short-term indicators are signalling a buy. But the rate of change indicator in the daily chart continues in the negative zone.

Weekly oscillators continue to move lower too, making lower peaks and troughs. It is therefore best to stay cautious with long positions. For the short-term as well as the medium-term trends are currently down.

However, if we extrapolate the down-move from 9,119-peak, we get the targets of 6,728 and then 6,144. Since the index has already moved close to the first target, a low could be formed at current levels after which we can have a rebound to 7,700 or thereabouts.

But sharp move below 6,700 will roil the short-term view and drag the index to 6,144.

The resistances for the near term will be at 7,315 and 7,600. Fresh long positions should be considered only if the index manages a close above 7,600. Else the trend will stay choppy.

Short-term targets on the downside are at the levels of 6,869, 6,775 and 6,495.

Sensex (23,709.1)

The Sensex too closed 723 points higher last week but the bounce is not strong enough to lend comfort.

Immediate resistance for the Sensex lies at 24,102 and 25,002. Fresh long positions are advised only on a strong close above 25,000. That will imply that the index is heading towards 25,490.

We need a close above 25,500 to signal that the medium-term trend could be reversing higher. As long as the Sensex trades below this level, it will stay volatile.

Global cues

Most global markets recovered along with crude oil prices that went up due to the production limit freeze. The CBOE VIX fell to 20.5, reflecting the ebb in risk aversion. The Dow recovered from the intra-week low of 16,012. But it could not move past 16,500. The inability to move past this level will mean that the index will dip to 15,500 once again. But, it needs to move above 17,000 to indicate that it is out of the woods.

Interestingly, India is among the worst affected in the ongoing sell-off among emerging Asian countries. Markets in Indonesia, Malaysia etc are well above the lows formed last August.

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