Sensex (16,162)
It was a week reminiscent of the last quarter of 2008 when sheer panic gripped investors. Hopes that the global economy would somehow avoid a recession dissolved with Markit's Purchasing Manager's Index readings released last week that indicated that Chinese manufacturing contracted for the third consecutive month and both German and French economies stagnated in September.
Investors already nervous after Federal Reserve's grim prognosis on the US economy and its ‘Operation Twist' capitulated on these readings, fleeing equity and commodity markets. Indian stocks that appeared to have reached a level of relative safety too were swept off their feet in the global sell-off. Surprisingly, mid and small-cap stocks put up a spunkier show, outperforming their large cap peers.
The 4.5 per cent decline in the Sensex is also milder when compared to other markets in emerging Asia. While Hang Seng, Jakarta Composite Index and Philippines PSE Composite lost between 9-0 per cent, Seoul Composite, Thailand SET and Taiwan Weighted Index were down 7 per cent. The only gainer in last week's mayhem was the Karachi 100 index, up 2 per cent. The fact that our market has underperformed its peers over the last 11 months appears to be finally acting in its favour!
Volumes peaked in the last two sessions of the week. The churn in the derivative segment was evident in derivative volumes moving close to the Rs 2,00,000 crore mark on Thursday and Friday. FIIs turned net sellers once again stoking the panic. DIIs took a contrarian stance and were net buyers. Open interest however remains low at around Rs 1,38,000 crore implying that risk of payment crisis is low at this point. Index put call ratio value is also quite high above 1.2 implying that prices are reaching the oversold levels.
Market participants will continue looking across the borders next week and things need to quieten down there before we can hope for sustained recovery in the local market. Derivative expiry coming up on Thursday could cause some short-covering, cushioning price decline. Second quarter numbers will also begin taking centre-stage from next week.
It was an about-turn for the Sensex after Wednesday and the short-term trend has reversed lower once again. Oscillators in the daily chart dipped below the neutral zone reflecting the deterioration in near-term outlook. Weekly oscillators too reversed lower in the oversold region.
The medium and long-term trends continue to be down but as discussed earlier, the index has key long-term support at 16,200 that occurs at 38.2 per cent retracement of the rally from March 2009. It also has psychological support around 16,000. However decline below will take the index to 15,765 or 15,645 where the index will once again attempt to find its mooring.
As explained earlier, troughs formed in February 2010 and November 2009 at 15,552 and 15,330 will also support the index on a decline below the recent trough at 15,765. A weekly close above 17,800 is the first requisite to signal medium-term reversal.
There was a semblance of stability in the US market on Friday and if the index builds on it in the early part of week, short-covering can set in taking the index to 16,487 and 16,756 in the upcoming sessions. Inability to move above the first resistance will imply that the index can move down in the short-term to the levels indicated above. These are uncertain times and there could be further upheavals before stock prices bottom. Investors with long-term perspective should however use the current volatility to cherry-pick their favourite stocks.
Nifty (4,867.7)
The Nifty recorded the intra-week peak of 5,168 and then reversed lower. As explained last week, failure to move above the critical resistance zone between 5,100 and 5,200 implies that the medium-term trend in the index continues to be down.
Since the index has moved below the short-term support at 4,900, it can now move down to 4,720 or 4,702 in the days ahead. It is possible that the index reverses higher from here forming a double-bottom. But a decline below this zone will pull the index to the supports on the chart at 4,675 and 4,538.
If the week begins on an upbeat note, the Nifty can move up to 4,958 or 5,038 in the upcoming sessions. Failure to move above the first resistance will be the cue for short-term traders to initiate fresh short positions. We stay with the view that a strong close above 5,340 is needed to signal that a sustainable recovery is under way.
Global Cues
It was a week in which the only asset still in demand appeared to be the US dollar and treasury bonds.
The dollar emerged as winner even as other currencies went in to a tailspin. The dollar index moved past the resistance at 78.5 to rise to 79.4 denoting that the greenback is in a medium-term uptrend.
European and commodity-oriented markets were the worst affected last week. DJ Euro STOXX 50 declined 6 per cent. This index is currently positioned just 14 per cent above its 2009 low. The CBOE VIX rose 43.8 as panic mounted on Thursday and closed near its intra-week high.
The Dow crashed to 10,597 on Thursday but the decline was stemmed at that level and a mild reversal was seen on Thursday.
This gives rise to the possibility that the index could recover to stage yet another short-term rally to 11,000, 11,200 or 11,550 in the upcoming sessions.
Failure to move above the first resistance would spell trouble from a short-term perspective and signal an impending decline to 10,400 levels.
Most commodities led by gold plunged lower. Gold lost 8 per cent last week but it is placed just above the short-term support at $1,650. Breach of this level will signal the onset of a medium-term correction in the yellow metal and dip to $1,450 or $1,500 is then possible.
Nymex crude futures are nearing the August low of $75.7. The contract has support in the zone between $74 and $76. Next support zone is around $65.