The bond, equity, and currency markets were caught in a vortex of turbulence, not just in India but in most other emerging markets last week. Equity prices dived, unnerved by a sliding currency. Sovereign bond prices, weakened by incessant selling by foreign investors, collapsed to historic lows, further spooking the equity and currency markets.
Some rearguard action by the Reserve Bank of India, mid-week, in announcing bond purchase of Rs 8,000 crore to ease the liquidity situation and allowing banks to reset the prices of bonds in their books helped 10-year government bond yields that had spiked to 9.47 – above the 2008-high of 9.46 — recede to more modest level of 8.2 by the end of the week.
The rupee was, however, not as easily tamed and continued to spiral lower, hitting a new life-time low at 65.5 on Thursday. It is on the actions of Ben Bernanke that the trajectory of our equity and currency market now hinges. If the idea of withdrawal is causing this great a turbulence, one shudders to think about the ramifications once the tapering actually begins.
Equity markets were assuaged towards the end of the week by the soothing noises made by the Finance Minister and the RBI Governor. Expansion in Chinese manufacturing helped metal stocks surge. Bargain hunting and short-covering also kicked in to take the benchmarks higher. At the end of all this volatility, net loss in the indices was less than 1 per cent.
The derivative expiry scheduled for next week will keep volatility high as traders cover their short positions. The June quarter GDP numbers will be keenly watched.
Oscillators in the weekly chart are in the negative zone. But some of them have already reached over-sold region leaving open a chance of a rebound from here. Daily oscillators are reversing higher in the oversold region in tandem with the recovery witnessed towards the end of the week. The hammer formation in both the Sensex and the Nifty charts are a positive since it shows that buying is emerging at lower levels.
Sensex (18,519.4)
After all the hullabaloo of last week, the Sensex is down a mere 78 points. True, most market participants had their hearts in their mouths as the index plunged below 18,000, but the bounce back has returned some cheer in the market.
As we have been reiterating, the index has a series of supports between 18,000 and 18,500. Next important support that also coincides with 61.8 per cent Fibonacci retracement of the rally from June 2012-low lies at 17,500.
The long-term outlook will be under serious threat only on a strong close below this level. In that event, a plunge to the support zone between 15,300 and 15,800 will be on the cards.
We do not need to worry about this eventuality yet as the index has made a smart close above the 18,500 level. The magnitude of this bounce will determine the short-term trajectory in the index. If the index fails to move beyond 18,760, it will mean that volatility will continue and the index will head towards 17,500 again.
Close above 19,380 is required to indicate that the short-term trend has reversed higher. That will open the way for another surge towards 20,000 as the index resumes its medium-term trading band of 18,000 to 20,000.
Nifty (5,471.7)
The Nifty hit the low of 5,254 before reversing higher to close with 36-points loss.
Despite the index breaching the support band around 5,470, it rebounded from the intra-week low of 5,254.
It is a little early to conclude if the down-move from the 6,093 peak is complete. The minimum targets have been achieved. But the rebound needs to progress further before we can be definite about a trend reversal.
The rally will face resistance at 5,580 and then at 5,773. Failure to move above the first resistance will mean that the index can reverse to head towards 5,254 or 5,181. The short-term trend will reverse higher only on a strong close above 5,770.
The medium-term view has not turned too adverse yet since the index has managed a close above 5,400. The long-term view will turn negative only on close below 5,181. This will mean that the index is heading towards 4,770 or 4,530.
Global Cues
Global equity did not witness undue volatility, except for the benchmarks in emerging markets such as Indonesia, Malaysia, Mexico, Singapore, Thailand and the Philippines. Many benchmarks traded in a narrow band and closed the week slightly lower. The CBOE VIX implies that volatility spiked mid-week as the VIX hit the peak of 16.5.
But it eased thereafter to end the week at 13.9. Key medium-term resistances for the index will be at 16.9 and 18.
The Dow hit the intra-week low at 14,880 but went on to end the week above the key support at 15,000. This level needs to be breached to drag the index towards its key medium-term support at 14,500.
Rebound from these levels can take the index higher to 15,200 or 15,370 in the days ahead. Reversal from either of these levels will mean that the short-term trend continues to be weak.