Index outlook: Dark clouds on the horizon

Investors are running out of reasons to buy stocks at current levels. Stock prices have not really corrected much to make valuations attractive and the earnings are not showing any improvement either.

It is therefore not surprising that both the Sensex and the Nifty appeared indecisive last week, moving in a sideways band.

The shenanigans of our elected representatives are not helping much either as key bills are stalled in a pointless game of political one-upmanship. Quarterly earnings announcements dominated other global markets too last week.

The Dow and the S&P 500 index declined sharply due to poor earnings of manufacturing and primary input companies, largely due to the ongoing slowdown in China. The strength of the US dollar is another factor that is not in favour of US companies. The dollar index has risen to 98, applying pressure on both the rupee and gold.

The week ahead could see stocks floundering some more as the stream of earnings continues. The FOMC meeting scheduled for mid-week will influence stock prices too.

Since economic data from the US continues to be mixed, it’s getting pretty hard to guess the Federal Reserve’s next move.

Foreign portfolio investors have taken a positive stance towards equity of late, pumping in close to $1.1 billion in July. In the previous month, they had net sold close to $521 million. But this stand could reverse due to the two negative developments on Friday.

One, the SIT on black money has asked SEBI to look closer at the antecedents of those holding P-notes. Two, the AP Shah committee report on MAT on FPIs is purported to be unfavourable to FPIs. Another reason for turbulence next week could be the derivative expiry scheduled on Thursday. Open interest in NSE derivative segment is soaring at ₹250,000 crore. The Nifty put-call ratio at 1 implies that the long and short positions are evenly placed, resulting in pressure from both directions.

The monsoon is turning out to be quite whimsical too. Cumulative rainfall up to July 24 is 6 per cent below LPA as per IMD. But the comfortable water levels in reservoirs are of comfort.

Oscillators in the daily chart are in the positive zone, but the negative divergence in the daily price rate of change oscillator — with the indicator recording a lower peak despite a higher peak in prices — implies that the uptrend lacks strength and is getting ready to fall in the near term.

The indicators in the weekly chart which seemed to be on the verge of a positive reversal are once more dithering in the neutral zone, close to the zero line.

This casts doubts on the ability of the indices to move higher from these levels. If they do, it will be quite surprising.

The Nifty moved in the range between 8,500 and 8,650 before closing with 88-points loss.

The week ahead: The index’s struggle to get past 8,667 implies that it is quite likely to head lower in the coming sessions. Heightened vulnerability in the charts of other Asian benchmarks and a potential reversal in the Dow too increase the chances of the index heading lower. The next downward target for the index continues to be 8,442.

The area around 8,400 is an important key short-term support, as the 200-DMA is present there and the 50-DMA is converging at that level.

The short-term trend will reverse lower only on a close below that level, paving the way for further decline to 8,200 or 8,000. Resistances for the week remain at 8,667 and then 8,808 or 8,957.

Medium term trend: Since the index hovers around the key medium-term hurdle at 8,667, we stay with the view that a strong break above this level will take the index towards the 9,000 mark.

On the other hand, decline below 8,200 will make the outlook quite bleak.

The Sensex too has become hesitant at the key resistance at 28,600.

The week ahead: Immediate support for the index is at 27,940. The 200-DMA at 27,900 makes the zone between 27,900 and 28,000 an important cushion. Investors can buy on declines as long as the index trades above 27,900. Targets on a decline below are 27,750 and 27,620. Resistances for the week will be at 28,578 and 29,094.

Most global benchmarks ended the week with steep losses. The CBOE volatility index perked up reflecting this nervousness, closing 15 per cent higher.

The sharp decline in the Dow Jones Industrial Average last week is a cause for concern.

The bearish engulfing candle implies that the fall can prolong.

The index will however get support at 17,540 on Monday. Breach of this level will mean that the index is headed towards 17,037. The medium-term trend in the index will reverse lower only on a close below this support.

Charts of most Asian and other emerging market benchmarks reveal that there could be steep declines in the offing for many of them.