Index Outlook: All eyes on the 16,000 bastion

Sensex (16,141.6)

Bears were on rampage last week wreaking havoc with stock prices sending a wave of panic down Dalal Street. The reasons for the sell-off were largely global: concern regarding European banks, Morgan Stanley downgrading global economic growth, fear that developed economies are on the verge of entering a recession again and so on. It is no secret that it was the FII fraternity that was responsible for permeating the global panic in to domestic stocks.

Amidst the all pervading gloom, there is one silver lining. Some Asian markets such as those in Malaysia, Thailand and Philippines offered islands where investors could hide from the carnage last week. This indicates that global investors are taking a closer look at emerging Asia as alternative investment destination. The moot question is when will India be included in this list?

FIIs pressed sales in secondary market in all the four trading sessions. Both cash and derivative volumes spiked on Friday, the day when the Sensex tested the 16,000 support and the Nifty breached 5,000. Open interest is extremely low around Rs 1, 40,000 crore indicating that there is no danger of any payment crisis as the August contracts expire next Thursday. Nifty put call ratio has also dropped below 1 implying that those holding shorts are booking profits close to the 16,000 mark.

The week ahead promises to be interesting as the bulls fight to protect the 16,000 bastion even as bears seek to press downward. The taut nerves of investors globally will ensure that any small development in Europe or the US will receive undue attention and elicit exaggerated reaction. Throw in the derivative expiry and we have an explosive week on the cards.

The truncated week that has gone by has not helped the Sensex' cause as it made the index miss last Monday's rally in the global markets. It is also rather precariously placed towards the end of the week, hanging on to the 16,000 support. Daily oscillators are extremely oversold. Daily relative strength index is at a level last seen in October 2008! Weekly oscillators are also in the oversold zone indicating that a medium-term bottom could be close at hand.

The Sensex is at the critical support zone around 16,000. As we have been reiterating, 38.2 per cent retracement of the rally from March 2009 low occurs at this level and if the Sensex holds 16,000 in this onslaught, it will mean that the bull-market is intact. Immediate supports below 16,000 on the charts are at 15,650 (trough formed in February 2010) and 15,330 (trough formed in November 2009).

In other words, investors can look forward to support in the zone between 15,300 and 16,000 even if the index dips below 16K. The going will get rocky only beyond 15,330, bringing subsequent Fibonacci retracements at 13,924 and 13,036 in to play. If we extrapolate the down move from 21,108 peak, 1:1 relationship gives us the target at 15,955. This level was almost achieved last week.

The short-term outlook is very wobbly. However, investors can expect some support around the 16,000 level. Bounce from here can take the index to 16,433 that is the ceiling of the gap formed on Friday and then to 16,774. Inability to move above the first resistance will keep the short-term view negative. Immediate targets below 15,987 are 15,771 and 15,650. Close above 17,460 is needed to signal a sustained medium-term recovery.

Nifty (4,845.6)

The Nifty plunged to an intra-week low of 4,796 before ending 227 points lower. The index is currently testing the critical support zone between 4,750 and 4,900. Supports just below are at 4,692 and 4,538, that were the troughs formed in November 2009 and February 2010. It is only if these long-term supports are breached will the next Fibonacci retracement supports at 4,248 or 3,989 come in to play.

Nifty moved past our short-term target at 4,895 on Friday. If the decline continues early next week, it can fall to 4,762 or 4,692. However, a rebound from the current levels will take the Nifty up to 4,950 or 5,050. Reversal from either of these levels will mean that the short-term will stay bumpy. Close above 5,198 or 5,240 is needed to signal a possible medium-term recovery.

Global Cues

Global markets that had been trying to stabilise themselves and claw back some lost ground since August 8 trough once again lost their handhold and began slithering lower towards a new low. Most of the critical benchmarks are, however, yet to breach this trough emphatically and the possibility of a double-bottom at these levels remains open.

The CBOE volatility index also spiked to the intra-week peak of 45.4 that is slightly below the high of 48 recorded in the previous week following the S&P downgrade of US debt.

Dow could not get past the resistance at 11,427 indicated in this column last week. This implies that one leg of the down move from May 2011 peak is yet to complete and the index could oscillate in the band between 10,427 and 11,500 for few more sessions before more sustainable recovery commences. The long-term support at 10,400 is very important support for the index in the days ahead and the going will deteriorate considerably if this level is violated.

The dollar index is in a log-jam stuck between 73.5 and 75.5. Though the consensus is that the dollar is in trouble, lack of other viable options is lending support to the greenback.