Much has been written about the ‘bloodbath’, ‘market mayhem’ and ‘black Friday’ that occurred on Friday. But if we look at the charts of the Sensex and the Nifty, the furore raised over Friday’s fall appears to be a case of ‘much ado about nothing’. The weekly loss in both the indices is a mere 1 per cent.
Bulls who had been labouring to put together a rally over the previous five trading sessions were forced to unwind their positions on Friday, thus wiping out the gains made in the previous sessions.
It was once again the fear that Federal Reserve could halt its quantitative easing program soon that set off a global sell-off in equity prices on Thursday. The mid-week holiday in our market on account of Independence Day exacerbated this decline. Worry created by the RBI’s moves to shore up the rupee further stoked the panic.
While the market reaction these events could be overdone, the fall does drives home the fact that the path of least resistance for the market in now downwards. There could be some more pain before the indices find a bottom.
Macro data was far from supportive with the industrial production for June contracting 2.2 per cent and July’s headline inflation numbers increasing by 5.79 per cent, up from 4.86 per cent growth in June.
Contrary to popular perception, SEBI data shows that foreign investors continued to be net purchasers in equity. They have net purchased $262 million of equity in the first fortnight of August. Their sales in the debt segment is however $962 million. Volumes in both cash as well as derivative segment spiked on the day the market was in a freefall. Open interest in derivative segment has reached Rs 1,39,000 crore. But low put call ratio, below 1, implies that market could be getting oversold at this point.
Oscillators in the daily chart are signalling a sell but in the oversold region. The weekly oscillators have all dipped into the negative zone reinforcing the weakness in the index from a medium-term perspective. The 50-day moving average moving below the 200-DMA too emphasises the weakness in the index from a medium-term view-point.
Sensex (18,598.1)
Has the dramatic collapse of Friday altered the medium-term view? No.
The Sensex continues to trade above the key medium term support zone between 18,000 and 18,500. It may be recalled that the index is currently charting a complex sideways pattern in the zone between 18,000 and 21,000.
This move has bullish connotation and keeps open the possibility of a break to a new high in the next 12 months.
But decline below 18,000 will drag the Sensex to the next Fibonacci support around 17,500. The long-term view will turn negative only on a close below this level. Since the index is still trading above 18,500, a pullback is possible in the short-term that takes it higher to 19,253 or 19,400 again. But the presence of both the 50 and 200 day moving averages at the second resistance makes it a very potent hurdle. Short-term trend will remain down as long as the index trades below this level.
That said, the weak closing on Friday means that this could be the onset of the third wave down from the 20,351 peak. Downward targets in this event are 18,280 and then 17,582.
Short-term resistances for the index are placed at 18,880 and 19,076.
Nifty (5,507.8)
The Nifty too staged a dramatic reversal on Friday. The ferocity of the fall and the juncture from where it reversed make it possible that this is the third part of the move that commenced from the 6093-peak. In this event, the current decline has the immediate targets of 5470 and 5430.
Breach of these levels will mean that the index is heading towards 5368 or even 5129. These will be the targets for the Nifty if the decline continues next week. If the index rebounds next week, short-term resistances will be at 5657 and 5750. Inability to move above the first resistance will be the cue for traders to initiate fresh short-positions. Short-term view will turn positive only when the index goes on to close above 5760.
Our medium-term view for the indices has not altered since the index continues to trade above the key medium-term support at 5480. The index needs to breach this support to indicate that it is heading towards 5380 or 5178.
Global Cues
Most global indices had a good week, managing to close with weekly gains. CBOE volatility index spiked sharply higher to the high of 14.8. Immediate resistance for the index is at 15.6. The index needs to move above this level to indicate that the medium-term view is turning negative.
It was the 225-point crash in Dow on Thursday that set off a domino-like action in some of the emerging markets such as India. The short-term trend in the index has now turned downwards. But the short-term view will turn overtly negative only on close below 15,000. Key medium-term support however exists at 14,500 and this level needs to be breached for the index to signal that the bull-party in the Dow has come to an end.
Not all the Asian markets were badly hit last week. Many of the indices such as Philippines Composite Index, Seoul Composite, Taiwan Weighted Index and Thailand’s SET closed the week in the green.
The sharp move in gold prices on Thursday has taken gold bears by surprise. If this is the third wave of the up-move from the June low, we get the target of $1375 and then $1486. Since the metal has already achieved the first target, some caution is required at current levels. But break beyond these levels will take the metal to $1470 - $1500 zone. This is likely to be a major hurdle for the gold over the medium-term. Close below $1250 is needed to reverse the ongoing uptrend.