Index outlook: On a wing and a prayer

The Sensex and the Nifty took wing on Friday and managed to close well above their previous peak. With another holiday-splattered week ahead, trading can be subdued with investors looking at overseas markets for cues.

Friday’s close was extremely upbeat, but it is to be seen if investors are able to keep their optimism high at those pumped-up levels. The first two sessions are therefore critical for determining the near-term outlook.

Traders can stay bullish as long as the Sensex holds above the previous peak of 27,354 and the Nifty above 8,180. Close below these levels will mean that Friday’s rally was a mere flash in the pan.

It was a news-heavy week with both the Federal Reserve and Bank of Japan doing their bit to influence stock prices.

The expiry of the October derivative contracts helped stock prices in Indian markets move higher in the early part of the week.

The shenanigans of the government over the black money stashed abroad by various eminent citizens of the country also kept investors riveted.

But action in global markets over the past month shows that investors are beginning to clutch at straws. This implies that the rally that stretched from 2012 could be nearing its final phase.

Between the third week of September and mid-October this year, most benchmarks sold off sharply on concerns that the US quantitative easing programme would end and the rate hike in the US is imminent.

These losses were wiped off because James Bullard, President of the Federal Reserve Bank of St Louis, expressed an opinion that the US was not ready for the end of quantitative easing.

On Friday, global markets spurted on Japan’s increased stimulus, while there was no reaction to the Fed’s hawkish statement after the FOMC meeting.

While momentum can carry stock prices higher from these levels, it would be best to be on guard. Wait for a sizeable correction before making fresh purchases.

The monthly charts of the Sensex and the Nifty throw up some interesting points.

The doji formation in September, that appeared to be a market peak, has been followed by another bullish candle.

This implies that the rally is far from over and the market will move higher from these levels before letting up.

The momentum indicators in the monthly chart are also continuing to power higher.

The Sensex has closed on a gung-ho note on Friday.

The week ahead: But tread a little cautiously on Monday. That trading session will determine the short-term trend in the index.

If the Sensex continues moving higher and closes on a strong note on Monday, upward targets are 28,032 and then 29,343.

But if the index reverses lower on Monday and closes below 27,000, fresh long positions ought to be avoided. Supports for the index are at 26,880 and 26,230. Short-term trend will reverse lower only on a close below 26,000.

Medium-term trend: It needs to be seen if the Sensex is able to move above 28,000 next week. Inability to do so will mean that the index can consolidate with a positive bias for few months.

If the index manages to power past 28,000, the next medium term target is 29,694.

We retain the key medium-term supports at 25,000 and 24,500.

The Nifty too managed an upbeat close on Friday.

The week ahead: The performance of the index on Monday is critical to determining the short-term trend.

If the index manages a strong close on Monday, the short-term targets for the index would be 8,344 and then 8,728.

Conversely, if the index loses steam on Monday morning and goes on to close below 8,180, it will mean that the index is heading towards 7,723 and 7,540.

Medium term trend: We need to see the action of the Nifty for two more sessions before we can determine if the medium-term uptrend has resumed.

If we assume that the final leg of the move from 5,118 is in progress, the index then has the targets of 8,445 and 8,892.

Key medium-term support stays at 7,300.

Global indices recovered strongly in the later part of the week. This helped some indices rise to new life-time peaks and others reverse from their near-term declines.

CBOE Volatility index that rose to 31 in mid-October has once again declined to 14. This shows that investor confidence is once more in an elevated state.

The Dow recorded a new closing high of 17,390. A reversal from here can pull it lower to 16,800 or 16,450 in the upcoming sessions. The short-term view will be threatened only on a close below 16,450.

On the other hand, target on a rally above 17,500 is 18,486.

The rally in the dollar index last week that took it to a multi-year high implies that the index can now head towards the next peak at the level of 89. This rally does not bode well for riskier asset classes including emerging market equities.