The action in financial markets in the first half of the week was reminiscent of August, when the hapless rupee dragged both bond and equity prices lower with it.

The cause for this turmoil was re-emergence of fears that the Federal Reserve could announce tapering of its quantitative easing program soon.

Rupee hit the low of 63.9, 10-year bond yields spiked to 9.13 per cent and the Sensex declined to 20,161 before the assurance from Janet Yellen, the next Fed chair, that easy money policy could continue for some time brought stability. The Finance Minister and the RBI Governor too joined the act in assuaging sentiments and talking up the rupee.

Industrial production growing at 2 per cent in September and exports growth at 13 per cent in October provoked some more talk of sprouting foliage. The CPI above 10 per cent and the WPI at 7 per cent for October were, however, a dampener as it keeps open the possibility of further interest rate hikes.

The Sensex has already declined 5.4 per cent or 1161 points from its recent peak at 21,321.

With the earnings season also winding down to a close, it will be the economic data, further RBI moves and the flows from foreign institutional investors that will determine the market direction. The extent of the ongoing rebound will give us some clues about the intended trajectory of the indices.

FIIs have been relatively subdued in their enthusiasm towards Indian stocks in November.

They have net purchased $644 million in equity, far below the purchase of around $2.5 billion in October.

Cash volumes were subdued while derivative volumes were at an elevated level. Cues from global markets are conducive with the Dow closing in on the 16,000 level and the S&P 500 nearing 1,800. The Nasdaq Composite Index has moved close to 4,000. There could be round of cheer as well as surge in caution next week as these indices reach these psychological thresholds.

Both the Sensex and the Nifty have reversed higher from their 50-day moving averages last week. The rate of change oscillator in the daily chart has declined below the zero line implying the onset of a short-term downtrend. The negative divergence formed in mid-October in this index also implies that the rally to the new high lacked momentum.

The daily relative strength index is however reversing higher from the oversold zone. This might mean a brief pull-back in the days ahead.

Despite the Sensex recording a fresh high, the Nifty did not replicate this feat. It was unable to move past its previous peak at 6357. This means that investors need to stay cautious as long as the index trades below this zone.

Sensex (20,399.4)

Sensex declined below the support at 20,500 indicated last week and went below our first downward target to hit an intra-week low at 20,161.6.

Now that we have a short-term down-trend in place, it is all a game of retracements from this point.

The ongoing rally will face resistance at 20,620 and 20,880. Reversal from the first level will mean that the index can decline to 19,900 or 19454 in the short-term.

If the index manages to rally to 20,880 and then reverses, it will mean a possible decline to 20,160 and the index can spend some time consolidating in the range between 20,900 and 20,160.

Strong move above 20,890 will make the short-term view positive and pave the way for rally to 21,321 and then lift the index above 22,000.

The medium-term view for the Sensex remains up. We will have to turn circumspect about this period only if the index goes on to close below 19,850. The long-term 200-day moving average present at 19,500 also will be a long-term trend decider. Subsequent supports are at 19,400 and 18,940.

The need for caution from a long-term perspective arises because the Sensex is in a corrective phase since November 2010. Inability to break firmly above the current trading range between 15,000 and 21,000 implies a possible move towards the lower end of this trading band in the coming months.

Nifty (6,056.1)

The Nifty recorded the intra-week low of 5972 before bouncing higher. Immediate resistances for the index are at 6,116 and 6,200. Inability to move above the first resistance will mean that the index can slide rapidly in the sessions ahead.

Investors can therefore initiate shorts with stop loss at 6210.

Downward targets are placed at 5887 and 5864.

Short-term view will turn positive on a move above 6200. It will mean the index is headed towards its previous peak at 6342 and then to the next long-term target at 6615.

The medium-term trend continues to be positive for Nifty. This outlook will be threatened only on a strong close below 5850.

Presence of the 200-day moving average at this juncture adds to the importance of this level. Subsequent supports are 5734 and the 5588.

We are poised at a critical level from a long-term perspective also. The index is in a shallow sideways correction since November 2010. If the B-wave of this correction ended in the muhurat session, the next C-wave can drag the index to 5200 or lower in the months ahead.

Global cues

Most global markets were range-bound, but held onto their multi-year highs. US and European markets displayed strength with the DAX and CAC closing at record highs. CBOE volatility index continued to decline last week, hitting the low of 11.99. This reflects confidence among the US traders that stock prices there will continue to move higher.

The Dow broke past the resistance at 15658 to record the new life-time high of 15,963.

The index has supports at 14,450 and 14,551. As long as the index trades above these levels, the short-term outlook stays positive.

The wave that has broken out has targets of 16,471 and then 16688. Key medium-term support for the index however exists at 13,675.

The Nikkei also surged with other developed market indices, gaining 1,079 points.

This index is heading towards its May peak of 15,942. Break above this level will take the index to 17,430.

> lokeshwarri.sk@thehindu.co.in