Index Outlook: Sensex meanders in the 22K alley

The rally in Indian stocks appears to have lost its way over the last two weeks. Frontline indices are moving sideways in a clueless manner around the psychologically important levels of 22,000 in the Sensex and 6,500 in the Nifty.

In the absence of market-moving news, investors appear to have retreated to the wait-and-watch mode. It was global events that dominated news last week. Russia annexing Crimea and the pitifully inadequate sanctions imposed by the European Union and the US did not roil global markets. Russian stocks too rallied this week.

It is the Chinese slow-down and effect of its rebalancing that has most global analysts worried. According to EPFR Global, China equity funds recorded their highest redemption till date, in mid-March.

The Federal Open Market Committee meeting and Janet Yellen’s hint that interest rates in the US will start moving higher from mid-2015 caused some jitters among global investors last Thursday. But these worries were soon forgotten and most global indices ended the week on an upbeat note.

While Indian investors appear hesitant, they are not bearish. This is supporting prices at these higher levels. The weekly candlestick chart of Sensex has a doji star followed by a shooting star. These patterns denote indecision among market participants and the possibility of a move in either direction.

With the derivative expiry scheduled on Thursday, traders are unlikely to start building fresh positions in the market. This can cause some more movement in the above-mentioned trading range.

Investors will soon start the game of the-RBI-will-lower-policy-rate-no-it-will-not with the monetary policy meeting scheduled for next week. The quarterly earnings of companies that will begin trickling in from the second week of April and the beginning of the Lok Sabha polls around the same time are also events that will impact stock price movement.

With the market meandering sideways, rate of change oscillator on the daily chart is rapidly moving lower, but it has not given a sell signal yet. Moving average convergence divergence oscillator on the daily chart too is on the verge of giving a sell signal. These indicators denote that market is vulnerable to a correction now.

Weekly oscillators are also close to the neutral zone. But the heavy negative divergence in the weekly price rate of change indicator is worrisome. Similar negative divergence is apparent in the monthly oscillator charts, which makes it quite likely that we are still in a long-term corrective phase that began in 2008.

The Sensex briefly flirted with the 22,000 level last week before sliding lower. But the decline has not been too sharp, implying that the short-term trend continues to be up.

The week ahead: The Sensex can continue vacillating in the range between 21,500 and 22,000. As long as this range holds, the chances of a break higher above 22,000 remain open. Supports on decline below 21,500 are 21,268 and 20,840.

The short-term view will turn negative only on a close below 20,840. The 22,000 level will continue to be a strong impediment for the coming week. Targets on break above this level are 22,355 and then 22,823.

Medium-term view: The Sensex has broken past the long-term ceiling at 21,500 and is doing a good job of holding above it.

If we extrapolate the move that began at 17,449, we get the targets of 22,355 and then 23,835.

In other words, there is a medium-term hurdle between 22,300 and 22,500. If this level is surpassed, the index can attempt a move towards 24,000.

The previous peak at 21,500 needs to be watched carefully now.

Close below this level will mean that the index can move further down to 20,300 — the key medium-term trend deciding level for the Sensex.

The Nifty too dithered in a narrow range of 6,470 and 6,570 last week. But continued sideways movement is resulting in a loss of momentum in the short-term.

The week ahead: Traders with a short-term perspective can hold their long positions as long as the index trades above 6,470.

But breach of this level will mean that the index is heading to 6,306 or 6,164. Short-term view will turn negative only on a close below 6,164. Previous high at 6,574 will act as a short-term hurdle. Break above this level will take the index to 6,562 or 6,690.

Medium-term trend: The medium-term trend in the Nifty continues to be positive. If we extrapolate the move that began from 5,119, we get the targets of 6,690 and then 7,158. Medium-term view will not be threatened as long as the index trades above its previous peak at 6,415.

Most global markets recovered last week to close with gains. European indices were among the notable gainers, once the investors there had seen the worst of the Crimea crisis. The DJ Euro STOXX 50 closed 92 points higher, close to its 52-week high.

The Dow recovered from lower levels to hit the high of 16,456 on Friday.

The short-term trend in the index remains positive since it has not breached the critical support at 16,000. This implies that the index can attempt to move higher after moving in the range between 16,000 and 16,500 for a few more weeks.