Index Outlook: Market at inflection point

Sensex (18,858)

The market was in a capricious mood last week with the Sensex cavorting around the 19,000 mark, keeping everyone on the edge. It was an iffy start to the week with stocks in a gentle slide in the first three sessions. The pyrotechnics on Thursday however made everyone wake up with a jerk. But just as market participants began re-drawing their strategy, it reversed lower resulting in the Sensex ending the week a mere 95 points higher.

FIIs continued to reiterate faith in Indian equities and they were net buyers in all sessions last week. According to the data released by BSE, they have net purchased Rs 3,500 crore worth of shares last week alone. Volumes were lacklustre in the early part of the week but perked up in the last two sessions. Open interest is at the lowest level seen in recent times reflecting the quandary that traders are facing regarding the direction of the equity market.

First quarter earnings that will come in a gush from next week will keep market participants riveted. All the economic data will be carefully scrutinised to guess what the RBI's next move will be in the monetary policy review scheduled towards the end of this month. The cushion of healthy global equity markets was withdrawn last week with renewed rumblings in Ireland and weak jobs report in the US.

Neither the bulls nor the bears emerged victors last week. The Sensex did not move beyond the 200-DMA at 19,140 and instead reversed lower from this line on Friday. Oscillators in the daily chart that were edging close to the overbought zone reversed lower on Friday. Weekly oscillators are pointing higher but are still in the neutral zone, implying that the index is currently at an inflection point from both a short and medium-term perspective.

The correction that began from last November has already lasted seven months making it a correction of the up-move that began in March 2009. This up-move lasted nearly 21 months. So time-wise, the Sensex has already corrected one-third of the move from March 2009. However, corrections that are shallow are seldom that short and can extend beyond 1:1 relation even in terms of time. A 61.8 per cent relationship between the two waves will give us the next target at December 2011 for the completion of this correction.

Fibonacci time-cycle lines drawn from the November peak also give us an important reversal point in the last week of June, where the Sensex reversed higher. We have to see if the current rally sustains, else next time-line would occur in October 2011.

Moving to price-movements, the Sensex has not made our job any easier with the erratic moves last week. The extreme short-term trend is still up and the supports for the days ahead are 18,438, 18,220 and 18,013. The short-term view will turn negative only if the index goes on to close below the first support.

On the other hand, the strong resistance in the zone between 18,850 and 19,200, mentioned last week can continue to thwart rallies. This zone needs to be surpassed before the index can move on to 19,800. The medium-term trend in the index is down since April and inability to surpass the hurdle around 19,000 will mean that the index can head lower to 18,000 or 17,300 can in the upcoming months.

Nifty (5,660.6)

The Nifty recorded the intra-week peak of 5,740 before reversing lower. The short-term trend in the index continues to be up and it will receive support at 5,530, 5,465 and 5,400 in the days ahead. Short-term traders should hold their long positions only as long as it trades above 5,600.

The short-term resistance zone between 5,650 and 5,750 will however impede the index's progress in the days ahead. 200-DMA at 5,750 will also be closely watched in the upcoming sessions.

Last week's move has not made the medium-term trajectory any clearer and we will wait for a strong move above 5,750 to indicate further move towards 5,900. Conversely, the index needs to decline below 5,400 to reverse the uptrend and re-open the risk of a decline below 5,200.

Global Cues

Most global indices moved higher in the early part of the week. But things turned turbulent in the second part of the week with credit concern in Ireland and weak US jobs report once more raising concern regarding slowing growth.

DJ Euro STOXX 50 declined almost 2 per cent on Friday to imply that the worst is not over as far as the medium-term trend is concerned. Return of nervousness among investors is reflected in CBOE volatility index spiking to 17 on Friday though it closed the session around 16.

The Dow held above the resistance at 12,500 in the first three sessions to record the intra-week peak of 12,754. It is to be seen if the correction that began on Friday prolongs below 12,420.

If it does then there will be the possibility of further decline to 12,200 or even 11,860.

The index could then be expected to spend few more months in a sideways range.

Most Asian markets opened with an upward gap last Monday and closed with strong gains. Nikkei closed 3 per cent higher, while Jakarta Composite and KLSE Composite closed at new highs.