It was a gritty show by stocks last week. Despite the uncertainties in the US and turbulence in Italian politics, stocks rebounded sharply in the latter part. That the ongoing US government shutdown will make the Federal Reserve put off its tapering plans was the ostensible reason for the cheer.
But it also shows that hope springs eternal among humans in general and among the stock-trading brethren in particular. That is not such a bad thing as this optimism will ensure that the next long-term bottom for the Sensex and the Nifty will be much higher than the long-term lows at 15,000 and 4,500 respectively.
The US government shutdown was the most talked-about event of the week, though stock markets were nonchalant about it. The more important issue is the urgent need to raise the debt ceiling. The US Treasury has warned that it might run out of funds to meet its obligations before October 17.
If the US government defaults on its debt obligation, that will cause a large bout of volatility in equity, bond, currency and credit markets. While the government is likely to prioritise its obligations towards bond-buyers over others, the likelihood of a default can cause intense short-term uncertainty.
Economic data released last week was mixed. Current account deficit at a lower-than-expected level in the March quarter helped cheer market participants. The HSBC Services Purchasing Managers' Index slipped from 47.6 in August to 44.6 in September, its weakest since April 2009. Eight core infrastructure industries grew at 3.7 per cent in August, the highest rate of growth in the last seven months.
Both the Sensex and the Nifty rebounded from the support level indicated in this column last week. Volumes were muted in both the cash and derivative segments of the exchanges. Foreign institutional investors have purchased $90 million of stocks in October so far but they have net sold $544 million of debt in October.
Sensex (19,915.9)
The Sensex followed the script laid out in this column last week. It reversed higher from the 50-day simple moving average at 19,290 and rebounded towards 20,000. The trajectory of the index in the week ahead can be thus.
The index can continue to move ahead but it will face resistance at 20,180.
Failure to move beyond this level will mean that the downtrend that began at 20,740 will resume, taking the index lower to 19,269 or 18,710.
The index needs to record a strong close above 20,180 to indicate a reversal in the short-term downtrend and the possibility of a move higher towards the recent peak at 20,739. Target on a move beyond 20,739 is 21,297.
The medium-term trajectory is still undecided. If the index manages a break above 20,700 in the coming weeks, the medium-term view will become positive. Failure to move beyond 20,180 will keep open the possibility of a decline to 17,200 or even below.
Nifty (5,907.3)
Nifty reversed from an intra week low of 5,700 to touch the peak of 5,950 on Friday. Investors now need to watch if the index is able to move above the key short-term resistance at 5,976.
Move above this level can take the index higher to 6,142 or even 6,332.
But its inability to move above 5,950 will be cue for short-term traders to initiate fresh short positions. Short-term targets are 5,797 and 5,705. If the index continues moving below 5,705, subsequent targets are 5,676 and 5,508.
The medium-term trend in the index is not yet apparent. A sharp move above 6,142 will give the next target at 6,332. On the other hand, a decline below 5,500 will open the way for decline to 5,150, or even below.
Global cues
Global markets took a step lower last week with many indices reversing their ongoing medium-term uptrends. The troubles in the US over the shutdown and the ongoing stalemate over raising the debt ceiling caused a sharp spike in the CBOE volatility index. It moved to an intra-week peak of 18.7 but closed at 16.7. The index needs to close above 18 to signal that the short-term outlook is worsening. The Dow moved to the low of 14,947 before ending the week at the key short-term support at 15,114.
Subsequent short-term supports are placed at 14,760 and 14,550. The short-term trend will reverse lower only if the index makes a strong move below 14,500. Resistances for the week ahead will be at 15,400 and 15,700.
The dollar index declined further last week to record an intra-week low of 79.7. The index has strong support at 78.9. A rebound from this level will keep the medium-term outlook for the index positive. A decline below this level can drag the index to the key Fibonacci support level at 77.5. Medium-term trend will turn negative only on close below this level.