Markets, both domestic and global, are finding it difficult to think beyond quantitative easing these days. In the first part of the week, stocks were subdued as they nervously awaited further indications of the future course of US Federal Reserve’s bond repurchase program from the minutes of the FOMC meeting.
Once the minutes revealed that half the members of the committee thought that the economy needed to recover further before the stimulus was halted, there was a resounding cheer from market across the globe. Indian markets too joined in the party with both the Sensex and the Nifty closing with strong gains on Thursday.
This obsession with the Federal Reserve and other Central Bankers’ moves is not surprising since it is known to all that it is liquidity that is keeping the Sensex propped around 20,000 and Nifty close to 6,000, despite bleak prospects for the economy and India Inc.
Infy’s strong first quarter earnings provided further reasons for stock prices to stride forward on Friday. Economic data however continued to be grim. While imports for June declined, so did exports. Industrial production for May contracted 1.6 per cent led by capital goods. Consumer price inflation was higher than expected at 9.87 per cent in June. Cash volumes were tepid through the week and picked up slightly on Friday. Derivative volume too improved in the second part of the week along with the reversal in stock prices. Open interest in derivatives segment is reaching Rs 1,42,000 crore. FIIs were net sellers in most sessions.
The movement of the rupee and FII flows will continue to cast a cloud over proceedings next week. Market participants will also keep an eye on crude price movement and the next set of earnings slated for release next week.
The sharp up-move in indices last week has taken the daily oscillators into the overbought region. That the Sensex and the Nifty are trading above their 50 and 200 day moving averages is a positive. The weekly oscillators are however still in neutral zone implying that the medium term view remains ambivalent.
Sensex (19,958.5)
The Sensex held above the support at 19,140 indicated last week and then went on to breakout beyond our first target at 19,845. If the index manages to hold its ground on Monday, the rally can continue onwards to 20,443 or 20,664 over the short-term.
But reversal on Monday can drag the index lower to 19,525 or 19,078. Short-term view will turn overtly negative only if the index goes on to record a strong close below 19,000. Movement above 19,500 will be conducive for short-term prospects.Our medium term view stays positive. Sensex needs to close below 18,000 to signal that the medium term view is deteriorating. Sideways move between 18,000 and 20,500 will mean that the index means to test its life-time high eventually.
Nifty (6,009)
The Nifty too took wing last Thursday to close the week 141 points higher. If the week starts on a buoyant move, the rally can continue to take the index onwards to 6109 and then to 6229.
But a wobbly start can pull it down to 5900 or 5802. Short-term traders can buy the index on declines as long as it holds above the first support. Decline below 5802 will mean that it can fall to 5741. Short-term view will turn negative only on a close below 5740.
The medium-term view for the index remains positive. The index has strong support in the zone between 5500 and 5600 from where it can engineer a turnaround. If the index manages to move above this support zone, it will mean that, following movement in a broad range of 5500 and 6200, the index can attempt to move on to a new life-time high eventually.
Most global markets recorded strong gains last week. The CBOE volatility index declined to 13.8, closer to its base level around 12 as confidence seems to be returning among investors.
US indices closed at record highs on Friday. A reversal from these levels can make the index vacillate between 14,500 and 15,500 for few more weeks. But target on break above 15,500 is 15,716 and 16,420. Key medium-term support stays at 14,360.
The dollar index retracting lower from the peak of 84.9 is good news for commodity prices. Close below 82.5 will however be needed to signal that the index is on its way lower for the medium-term.