There is a mild air of caution in Dalal Street. Investors appear to be taking it a little slow, to ponder over how much further stock prices can move from here. This watchful stance is welcome since we are drawing close to a critical event – the Union Budget. This event will determine the medium-term trajectory of the market.
In other words, the movement of the indices before and after the Budget will signal if the rally has run its course or if the party will continue till the end of this calendar year.
It needs to be remembered that the Sensex is already up 29 per cent since the February low. This can make some market participants take money off the table. With monsoon being poor so far and El Nino yet to manifest itself, both inflation as well as economic growth are going to be a concern. Foreign Portfolio Investors too were seen selling stocks in some sessions last week.
It was a down-up-down kind of a week in the stock markets with the indices on a roller-coaster ride ahead of the derivative expiry scheduled last Thursday. Slight abatement of the Iraq crisis and cooling of crude prices helped to support stock prices.
The government was in an overdrive with a slew of announcements last week. Besides putting off the gas price hike, it also extended excise duty cuts on autos, capital goods and consumer durables that was announced in the interim Budget.
Err on the side of cautionThe earlier hike in railway freight and the postponement of gas price hike indicates that the government will not be able to dole out concessions to please the industry and investors in the Budget.
With the odds stacked against the bulls currently, it is better to err on the side of caution. Rate of change oscillator in the daily chart has moved into the negative zone, implying that the short-term trend has reversed downward.
Relative strength index and moving average convergence divergence indicators are also declining sharply, confirming this trend. Weekly oscillators, however, continue to feature in the positive territory. These oscillators are moving in a range implying that the medium-term trend is not under threat yet. The doji star formation in the weekly Sensex chart followed by the shooting star pattern implies that the near-term trend is ambivalent.
The possibility of a breakout in either direction remains open.
Sensex (25,099.9)
The Sensex gyrated strongly in both directions before closing on a flat note last week.
The week ahead: The Sensex’ movement last week implies that the short-term trend remains down. Immediate resistances for the index are at 25,427 and 25,735. Inability to move above the first resistance will imply that the index can move lower to 24,789 or 24,163 in the coming sessions.
Target on a sharp move above 25,736 is 26,450.
The medium-term: There is no change in the positive medium term trend. This trend will be threatened only on a close below 24,160.
The index faces strong medium term resistance around 25,500 and investors need to tread with caution till that level is breached. Move beyond 25,500 can take the Sensex to 26,956 or 27,140.
Nifty (7,508.8)
The Nifty too bumped its way through last week.
The week ahead: Nifty tested the support at 7,478 indicated last week but bounced off that level. The index continues to hover above this level. Short-term traders can hold their long positions as long as the index trades above 7,400.
Breach of this level can drag the index to 7,346 or 7,118. Immediate resistance for the Nifty is at 7,605. Another reversal from here will be a cue for traders to initiate fresh shorts for targets of 7411 or 7346. Short-term trend will turn positive only on a close above 7,700.
The medium term: There is no alteration in our medium-term view. It stays positive as long as it trades above 7,051. Target on a break above 7,700 stays at 8,071.
Global cues
Global indices gave up some of the gains recorded in the previous weeks.
European indices logged gains, marking the beginning of a short-term down-trend. While worries about slowing growth affected stocks, reduction of the tension in Iraq supported prices. CBOE VIX continues to move in a narrow range at lower levels implying that the confidence among US investors continues to be high.
The Dow witnessed a volatile week with the index hitting the intra-week low of 16,746. But the index has managed to hold above the short-term support at 16,700. This level needs to be breached before the index can slide lower to 16,600 or 16,341. Short-term resistance for the index is at around 17,000.
The Nasdaq Composite broke out to a new multi-year high last week. If this index sustains above 4,370, it can go on to 5,000 over the medium term.