Index outlook: Fed and rupee back in focus

It was a sombre week for the Indian equity market. While the week started on a positive note, the benchmark indices — the Nifty and the Sensex — soon lost ground on fears of a rate hike by the Federal Reserve and poor performance by public sector banks. Expectations of further increase in US interest rates gained traction, after minutes from the US Federal Reserve's April policy meeting, released last week, showed that Fed policy setters discussed the possibility of a June rate increase if the economy continued to improve. Concerns over future foreign inflows due to tougher norms laid down by the Securities and Exchange Board of India (SEBI) on offshore derivative instruments (ODIs) or participatory notes (P-Notes), further whittled the gains. The rupee weakening against the dollar also triggered profit-taking and dragged the broader indices down.

Sustained weakness in the rupee, that posted the biggest weekly decline, and possibility of a rate hike by the Fed can accelerate outflows from emerging-markets. Last week, the rupee fell 1 per cent against the dollar to close at 67.45 levels. A win for BJP in Assam and regional parties dominating other States went unnoticed or muted amid global events. The profit-booking can continue in the week ahead if the domestic currency retreats further against the dollar. Fear of a delay in monsoon can also play spoilsport in the coming weeks.

The Nifty and the Sensex declined 65 points or 0.8 per cent and 187 points or 0.7 per cent correspondingly last week.

After trading in a narrow band between 7,800 and 7,900 for almost eight trading sessions, the Nifty slipped below the lower boundary on Thursday. Testing the key support at 7,800 and then closing below it, is a cause for concern.

The week ahead: The Nifty can find support at 7,700 and pause for a while. Further slump below the 7,700-mark will intensify the selling pressure and drag the index down to its significant support band between 7,550 and 7,600 in the short term.

The indicators such as price rate of change and relative strength index trending down, also signifying weakness. Therefore, traders should remain vigilant and initiate short position on a decisive fall below 7,700 with a fixed stop-loss. An upward reversal from the immediate base level at 7,700 can keep the index trading in the range of 7,700 and 7,800, in the coming week. Only a strong rally beyond 7,800 can bring bulls back and take the index higher to 7,900. Conclusive move beyond this resistance can take the index northwards to 8,000.

Medium-term trend: Since late March, the index has been consolidating sideways in the wide range between 7,600 and 8,000 and this can extend in the coming weeks as well, as it faces difficulty in extending the bullish momentum. Breakthrough of the 8,000-mark will take the index higher to 8,100 and then to 8,175 in the medium term.

Next barrier is poised at 8,300. Nevertheless, an emphatic plunge below the key support in the 7,550-7,600 zone can reinforce the bearishness and pull the index down to 7,400 and 7,250 over the medium term. We reiterate that investors with a medium-term perspective should watch the key support band keenly.

The 200-day moving average limited the rally in the Sensex last week. It closed firmly below the average and its immediate support at 25,500.

The week ahead: The weakness in the index can continue and drag it down to test the key support at 25,000 in the coming week. A strong fall below this level is needed to pull the index down to 24,500 in the short term.

The medium-term uptrend that commenced in late February will be in place as long as the Sensex trades above 24,500. Subsequent supports are at 24,000 and 23,000. However, resumption of the uptrend from the immediate base levels can take the index northwards to 25,800 and 26,000 in the short term. Breakthrough of 26,000 can take the index higher to 26,300 and 26,500 thereafter.

The Bank Nifty underperformed the broader indices by declining 1.4 per cent last week. The index now tests a key support at 16,500 — where its 200-day moving average is poised. Strong fall below this level can pull the index down to 16,250 levels.

Further decline below this level can strengthen the bearish momentum and drag it down to 16,000 or 15,800 in the short term. Traders with high risk appetite can initiate fresh short position on a strong fall below the current support level with a stop-loss at 16,700.

The medium-term uptrend will be in place as long as the index trades above the significant supports at 15,500 and 15,200. Breakthrough of the key resistance at 17,000 can take the index to 17,250 and 17,500.

Last week, the Dow Jones Industrial Average was volatile and closed marginally on a negative note at 17,500. The index tests a key support at 17,500.

Strong fall below this level can pull it down to 17,200 and then to 17,000 in the short term. Resistances are at the levels of 17,800 and 18,000.