Index Outlook: Poised at critical support

The Chinese year of the monkey is proving to be quite taxing. The Chinese stock market dragged other markets sharply lower last week and trading screens across the world were awash with red.

The Sensex and the Nifty collapsed, closing more than 4 per cent lower. The positive takeaway is that both the indices are now positioned just above the lows recorded in September and December 2015. This level needs to hold to keep the broad trading band going. Any further decline will weaken the medium-term outlook considerably.

The goings-on in China’s mainland exchanges last week highlight the futility in trying to control market forces. The fear that a trading ban imposed on large investors last July will be lifted on January 8 led to panic selling in China on Monday, resulting in a halt in trading. The Peoples Bank of China setting the yuan reference rate sharply lower added to the panic. These events were repeated on Thursday with the benchmark hitting the circuit breaker yet again and trading shutting down.

However, on the charts, all is not lost for the Shanghai Composite Index. It closed 10 per cent lower for the week, wiping out almost the entire gains made since last October. While this does give a set-back to hopes of a recovery, there is an important support for the index at 2,850. If this level holds, the index can move sideways in the band between 2,850 and 3,750 for few more months. The outlook for the index will turn positive only on a strong close above 3,750.

In India, third quarter earnings are expected to start flowing next week and these will cause stock-specific activity. Macro data on industrial production and inflation will also set the tone for trading this week.

The oscillators in the daily and weekly chart are giving a sell signal in line with the decline in prices. But the deterioration in the monthly oscillator is of greater concern. The 10-month rate of change oscillator has moved to the negative zone implying weakness in the long-term outlook. The MACD oscillator in the monthly chart also signals a sell.

The Nifty closed the week close to its intra-week low at 7,556.

The week ahead: The Nifty is now poised close to the critical support at 7,551 (low formed on December 14) and 7,539 (on September 08). The short-term view will deteriorate significantly only if these levels are breached.

Next short-term target is 7,380.

Resistances for the week will be at 7,716 and 7,817. Inability to move past the first hurdle will imply that the index can head lower in the near term.

Medium term: The index is close to a critical support from a long-term perspective. Recovery from the current levels can make the index vacillate in a range between 7,500 and 9,000 for few more months. But a decline below 7,500 will mean that the trading band is set to get wider.

If the Nifty continues declining this week, it will mean that the wave from 8,336 is extending. This move has the targets of 7,486 and 7,187.

The second target occurs close to the 50 per cent retracement of the up-move from August 2013-low.

The Sensex too is halting at the important support at 25,000.

The week ahead: A weak start can make the Sensex decline to 24,664 or 23,833. Near term resistances for the index are at 25,364 or 25,682. The inability to move above the first hurdle will indicate that the index is likely to move lower in the coming sessions.

The medium-term trend in the Sensex will also be determined by the movement over the coming week. Further decline from the current levels can drag the Sensex to 23,800 or 23,400.

The Bank Nifty too turned extremely weak last week. Immediate target for this index for the coming week would be 15,762.

If this level is breached, next support is at 15,130.

Resistances for the week are placed at 16,448 and 16,687.

The nascent uptrend in many of the global benchmarks reversed last week, signalling that the medium-term downtrend continues to be in place.

Some indices such as Brazil’s Bovespa fell to multi-year low.

The CBOE VIX, the investors’ fear gauge, spiked to the high of 27 last week and closed near the weekly highs.

This indicates that while investors in the US are a worried lot, they are not yet panicking. Since the CBOE VIX is based on the S&P 500 options, this index mainly captures the sentiment in the US.

The Dow turned extremely weak last week, plunging 1,078 points lower. It is now poised at 16,346, which is a critical medium-term support for the index.

Further decline below this level will mean that the index can test the August 2015 low of 15,370 level.

The area around 15,300 is critical from the long-term perspective and will determine the long-term trend in the index.

Crude oil also slid lower last week with Nymex light crude prices declining to $32 a barrel by the end of the week.