Index Outlook: Central banks to the rescue

Investors straggling in to trade after a long weekend will have to shake off the holiday stupor and get bright and alert early. For we have an action-packed week ahead of us.

People’s Bank of China cut its benchmark interest rate by quarter points and lowered banks’ reserve requirement by half percentage points late on Friday.

The move follows a very low 6.9 per cent in the third quarter GDP growth; the lowest since 2009. This move will affect the opening prices on Monday morning.

China’s move follows indications by the European Central Bank, earlier last week that it will do all it can to give a leg-up to growth and inflation.

These moves will weigh heavily on the Federal Reserve and Bank of Japan that are scheduled to hold their monetary policy meetings this week. Clues emanating from these meetings will determine the short-term trajectory of equity markets.

If the Fed continues to adopt the line that ‘uncertain external environment’ stands in the way of monetary policy normalisation, equity markets are likely to move further up next week. The charts of major benchmark indices, including the Dow Jones Industrial Average, CAC and DAX, recorded strong gains last week. These gains have made the near-term view positive for equities.

Indian indices also edged higher last week. But they are yet to clear important medium-term hurdles. It would be best to stay cautious until they do so.

Derivative expiry scheduled for Thursday will influence trade this week. With the ongoing rally having lasted since the beginning of this month, those holding long positions will now have to decide how much steam is left in the rally.

Quarterly earnings of companies will continue to cause stock specific movement. Foreign portfolio investors have turned net buyers in Indian markets.

They have net purchased $850 million of stocks so far this month and $2.1 billion on debt instruments.

The Nifty inched higher in a tentative manner to close slightly higher last week.

The week ahead:  Daily oscillators such as the price rate of change indicator have started dipping after the sluggish movement last week. However, weekly indicators have given fresh buy signals, implying that medium-term trend could be reversing higher. Monthly indicators have also halted their slide.

This implies that we are close to an important level from a medium-term perspective. Sharp move from here will turn the medium-term view positive, paving the way for a move towards the previous peak towards 9,119. Immediate hurdle for the Nifty however remains in the band between 8,400 and 8,500. As explained earlier, the presence of the 200 day moving average and the ceiling of the gap formed on August 20 make this an important hurdle for the index.

Supports for the index however exist at 8,100 and 8,044. Short-term investors can buy on declines as long as the index trades above 8,100.

Medium-term trend:  The index is nearing key levels from a medium-term perspective. A strong close above 8,500 will be the first indication that the medium-term trend has turned positive. Subsequent targets will be 8,654, 8,845 and 9,119.

Key medium term support exists at 7,841.

The Sensex too managed to move higher and close with mild gains last week.

The week ahead:  The short-term trend in the Sensex continues to be up. Immediate hurdle for the index is at the 200-day moving average at 27,657. Move above this level will take the index to the key medium-term trend deciding level at 28,000.

If the index is able to move above this level, it will mean that the medium-term trend has turned positive, paving the way for a rally to the previous peak of 30,024. Short-term supports for the index are at 26,787 and 26,500. Investors can buy in dips as long as the index holds above the second support.

The CNX Bank index continued to struggle around the 18,000 level. The index vacillated in a narrow band between 17,500 and 18,000 last week retaining a positive short-term view.

Third wave of the move from 15,762 gives us the first target of 17,816 and the next target of 18,538. Since the index is hovering around the first target, a strong spurt is required to take it towards the next target.

Fibonacci retracement targets give us the next resistances at 18,328 and 18,944. Immediate support is at 17,430 and at 17,143. Traders can hold their long positions as long as the index holds above the first support.

Global benchmarks managed to move higher last week. European indices such as the CAC and the DAX moved up sharply on dovish comments made by the ECB. The DJ Euro STOXX 50 index also managed to close almost 5 per cent higher.

The strong rally in US markets on Thursday and Friday helped the Dow Jones Industrial Average move beyond the resistance at 17,260. The medium-term trend for the index has now turned positive. There is a strong possibility of the index going on to its previous peak of 18,350 now. Supports on the way down will be 16,811 and then 16,500.

The spike in the dollar index to 97.4 is not good news for the rupee. This index appears to have a firm base at 93. Immediate hurdle for the index is at 98. Break above this level can take it to 100.