Index outlook: Market raring to move higher

The month of May was fairly benign for the Indian stock market. The Sensex and the Nifty halted the slide that began in March and are now attempting to find the base for a correction that threatens to drag on for a while.

Trading last week did not disappoint the excitement-seekers. Stocks turned wobbly in the early part of the week as the expiry of the May derivative contracts as well as nervousness in global markets over an impending interest rate hike put pressure on domestic stocks.

However, some rearguard action by the bulls on Friday helped stocks wipe out almost all the losses made in the early part of the week.

As far as the short-term trend is concerned, the recovery after a short decline lends hope that stocks can move higher from these levels. With the RBI’s monetary policy set to dominate next week’s trading, a rate cut by the central bank will send the Sensex to 28,700 and the Nifty to 8,700.

There is a strong likelihood of the ongoing rally fizzling out at these levels.

If the rally continues beyond 8,700 in the Nifty, it will imply a possible move to a new high once again.

As a dismal earnings season rolls to a close, investors are likely to be hard-pressed to find reasons to justify buying stocks at these levels. At the same time, the hope of the elusive ‘economic recovery’ making an appearance in the coming quarters will ward off a steep sell-off.

That leaves us with a sideways moving market for few more months with buying opportunities emerging every now and then.

Foreign portfolio investors have halted the selling of Indian equities. Their net selling in May has reduced to $904 million.

Derivative turnover on the National Stock Exchange hit record levels in the expiry session. Turnover in excess of ₹40,000 crore in the cash segment on Friday signals that retail interest remains strong in the market.

The Sensex hit the intra-week low of 27,354 on Thursday before the smart reversal on Friday.

The week ahead: The Sensex dipped briefly below the 200-day moving average but has managed a weekly close above this level. The bounce after testing the 27,500 level is also a positive from a short-term perspective.

The rally that began on Friday will face the first hiccup at 28,071. If it fails to move past this level, sideways move between 27,500 and 28,000 will follow. Such a move will retain the positive short-term view.

Strong move beyond 28,071 will open the door for a rally to 28,240 or 28,670.

Supports for the week exist at 27,254 and 27,056.

Medium-term trend: As explained in the previous column, we will view the ongoing rally as a corrective bounce in a medium-term correction that began at 30,024.

This bounce has already achieved the minimum target at 27,800. So, a reversal that starts the third leg of the correction can take place anywhere from here.

The decline in the early part of the week dragged the Nifty to the intra-week low of 8,270. But Friday’s rally has helped the index close with a doji in the weekly chart.

The week ahead: In the daily chart, the candle formed on Friday is lodged between the 50- and 200- day moving averages.

But the reversal from the low at 8,270 appears to be the third part of the short-term rally that began at the low of 7,997 on May 7. This wave has the targets of 8,574 and 8,762.

The current rally will initially face resistance at the previous peak at 8,489. If it fails to move past 8,500, a decline to 8,270 will be on the cards. Strong move above 8,500 is needed to take the index to 8,574 or 8,762.

Supports for the week will be at 8,242 and then 8,176.

Medium-term trend: A three-wave corrective move (A wave) has been completed at the low formed on May 7.

We will assume that the current rally is a correction of this down move (B wave).

This B wave can end around 8,500 or 8,700. Reversal from either of these levels will start the next leg downwards (C wave).

A strong close above 8,700 is required to indicate that the medium-term trend is turning positive and the index is on its way to a new high again.

If the C wave gets intense, decline up to 7,500 is possible.

Global indices gave up some gains last week. European indices such as CAC, DAX and FTSE recorded weekly losses. The CBOE volatility index also moved slightly higher to 13.8, reflecting the change in investor sentiment.

The Dow closed 221 points lower after recording an evening star pattern in the weekly chart. The supports for the index stay at 17,820 and 17,514.

Sideways move between 17,500 and 18,200 will retain the positive outlook for the index.

Many of the emerging market indices including Brazil’s Bovespa and Russia’s RTS index lost some ground last week.

The Shanghai index ended the week with losses after hitting the 5,000 mark.