Tuesday, February 16, 2016

Index outlook: Where’s the floor for the Nifty?

We are emerging from one of the scariest weeks in recent times. The Sensex breached the key support at 24,000 on Wednesday and the Nifty fell below 7,200. That set the stage for the mayhem that followed on Thursday.

Once again, it was crude oil that triggered the fall. Crude slipping below $27 a barrel renewed concerns regarding global growth.

Many global banks in the US and Europe had already been sliding since the beginning of the week on fear of defaults arising due to their exposure to commodities and China. Janet Yellen’s statement about risks to growth from the ongoing correction further stoked the panic, leading to a deep cut in stocks across the globe on Thursday.

The Black Thursday in Indian markets was exacerbated by the large provisions and poor earnings posted by domestic banks. The 800 points cut in Sensex and the close below critical levels has shaken the confidence of investors in the structural bull market.

But there is a possibility of a rebound in the early part of the week. Crude gained 11 per cent on Friday, giving a fillip to stocks. Jamie Dimon’s purchase of 500,000 shares of JP Morgan worth $26.6 million as a symbolic gesture to show his faith in the company helped bank stocks move up sharply on Friday with JP Morgan rallying 8.3 per cent. There is a likelihood that he has helped stem the fall, at least temporarily. The Dow Jones Industrial Average and the S&P 500 closed around 2 per cent higher on Friday.

But Chinese markets that were closed last week will open for trading this week and will have to play catch up. Indian investors will also have to react to the next set of quarterly earnings and inflation numbers.

How much lower?

The Nifty closed at 6,980 on Friday and the Sensex at 22,986. Both the indices are close to the psychological supports at 7,000 and 23,000. Both the indices are testing long-term supports now and we need to step back and look at the long-term picture to understand this move.

Nifty 50 (6,980.9)

The structural uptrend in the Nifty has been in force since the low of 920 made in 2003. The third part of this move that began from the low of 2,860 recorded in November 2008, appears to be unfolding now. The fourth part of the move began from the 9119 peak. According to this count, the Nifty can dip to 6,500 or even 6,335.

If it dips below 6,335, then the counts will have to be re-cast. The possibility of a zig-zag formation from 2003 that completed at 9,119 becomes a possibility then. In that case the decline can go on to 6,000.

In simple English, we have to see if the Nifty halts at 6,335. If it does, there is a possibility of a recovery that makes the index move sideways for a year or more before the structural up-move resumes.

Typically, if the decline is a correction in a structural bull market, it ought to halt at 30 to 33 per cent decline from the peak, the way the Nifty did in 2004 and 2006. According to this metric, the 6,383 level becomes very critical.

Since both the peaks of 2008 and 2010 were formed around 6,300, this is the level that is of utmost importance from a long-term perspective.

Sensex (22,986.1)

The Sensex is similarly in a structural uptrend from the 2003 low of 2,904.

The third part of this move that began from the 2008 low has a long way to go. If we assume that the fourth minor of the up-move from 7,697 is currently in motion, the fall can extend to 21,201.

The entire assumption will have to be discarded if 21,201 is breached. A deeper decline becomes possible then.

If we compute the 30 per cent correction from the recent peak of 30,025, the level we get as a critical long-term support is 21,016.

This coincides with the peaks formed in 2008 and 2010. The convergence of supports at 21,000 means that long-term investors need to feel perturbed only on a close below the 21,000 level.

The week ahead: Any rebound next week will face resistance at 7,158 and 7,321. Inability to move above the second resistance will mean that the volatility will continue over the near term, dragging the index lower to 6,869 or 6,652.

The Sensex will face resistance at 23,531 and then at 24,066 in the coming week. Fresh purchases for the short-term should be considered only on a close above 24,066. Inability to move past these levels will drag the indices lower to 22,600, 22,284 or 21,108.

Global cues

Most global markets headed sharply lower last week. But the recovery on Friday has helped them regain some ground. The CBOE VIX hit the high of 30.9 on Thursday as nervousness among investors mounted. But the index retracted on Friday as stock prices rebounded helping the index close at 25.4.

The Dow tested the key support at 15,500 before rebounding last week. This implies that the medium-term trend in the Dow remains up.

Immediate resistances for the Dow are at 16,462 and 17,016. The index needs to close above 17,016 to indicate that the short-term threat has dissipated.

The break-down in the Hang Seng last week is a little worrying. The index has moved below the long-term support at 8,000 and appears primed for a prolonged fall now. This shows that foreign investors who invest in to China through Hong Kong have finally given up on the China story.

Another index that capitulated last week was the Nikkei. If it does not recover next week, the index can move all the way down to 14,500 or 13,000.

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