The stock market was buffeted by wave after wave of negative tidings last week that dragged the Sensex well below the critical support at 16,500 and the Nifty below 5,000. There was a dramatic intra-day turnaround on Monday as the Finance Minister announced a one-year reprieve on GAAR.
But the reversal could not sustain and stocks turned tail once again in the next session dragged down by needless RBI rhetoric on there being little room for further interest rate cuts. Weakness in the rupee and the Central Bank's feeble efforts to control it added to the feeling of despair. March's industrial production number proved to be the final straw that resulted in the Sensex recording its lowest weekly close in four months.
Trend in the global market has not been conducive either with Greece struggling to set up a coalition Government, continuing doubts over sovereign debt of European nations and slowing industrial production in China.
Volumes were higher in sessions when market witnessed a sell-off. According to SEBI, the FIIs were net sellers in the first three sessions though they turned buyers on Thursday. The index put call ratio, in value terms, declining below 1, implies that market is reaching oversold level. Open interest is also quite low, close to Rs 113,000 crore.
It is likely to be tough for the market in the upcoming week as stocks attempt to find a floor. The weak industrial production numbers will make market participants take a closer look at the inflation data due next week to gauge if the Central Bank will cut interest rate further.
Momentum indicators in the daily chart have plunged deep into the oversold territory. Daily relative strength index has reached levels last recorded in December 2011 implying that a reversal is possible in the near-term. The greater worry is however the weekly momentum indicators moving deep into bearish zone. Both the Sensex and the Nifty closing well below their 200-day moving averages also does not bode well for these indices.
Sensex (16,292.9)
The Sensex opened with a downward gap on Monday morning and closed the week with 538 points cut. Since the index has closed below the support at 16,429, it is time to review the long-term outlook for the index again.
Long-term trend in the Sensex is down since the 21,108 peak recorded in November 2010. One leg of this down-trend ended at 15,135 last December. Last week's decline has made it obvious that the up-move since this January was a pull-back rally or the B wave of this long-term correction.
That this wave has retraced less than 61.8 per cent of the previous decline makes it possible that the C wave or the third leg of the correction could have started from the recent peak at 18,523. This wave has the first target at 14,831. Since this target occurs slightly below the December low of 15,135, investors can look forward to the index bottoming around 15,000, if the weakness persists.
It is quite likely that the index makes a double bottom at this level and reverses higher. In that event, the Sensex can spend rest of 2012 vacillating in the band between 15,000 and 18,500. But if it declines below 15,000, then the Fibonacci retracement of the up-move from March 2009 trough will come into play, giving us the targets of 14,577 and 13,036. The second target of the C wave roughly coincides with 13,036.
If we consider the minor waves of the down-move from 18,523, the long drawn triangle formed in March and April appears to be the second wave with the third unfolding currently. This wave has the targets of 16,016 and then 15,080.
In other words, the area around 16,000 can provide psychological support to the index. If this is breached, the previous trough at 15,135 and 15,080 will support the index. Resistances for the near term would be at 16,700, 16,837 and 16,983.
Nifty (4,928.9)
The Nifty has taken a step below the critical support at 4,950. But this level has not been shattered emphatically yet. If the index continues to move lower next week, it will imply that the C wave of the down-move that began at the 6,338 peak is currently unfolding. This wave has the first target at 4,512. Since this coincides with the December trough at 4,531, investors can look forward to the support around this level to cushion any decline.
But if the index continues moving lower, then the Fibonacci retracement of the up-move from 2,539 low should be taken into consideration.
These supports are at 4,438 and then at 3,990. It is however likely that the decline once again halts around 4,500 and the index spends rest of this year moving in the band between 4,500 and 5,500.
If we consider the downward move from 5,630 peak, the third wave of this move gives us the targets of 4,884 and 4,600. Since the index is placed close to the first target, traders should tread carefully with their short positions in the near term. Sudden reversal from this level can catch them on the wrong foot.
Short-term resistances would be at 5,050, 5,094 and then 5,138. Traders should close their short positions if the index moves above the first resistance.
Global Cues
Global indices were volatile but closed just a tad lower last week. The Dow closed 183 points lower at 12,855. The short-term outlook for the index however remains positive. It needs to close below 12,500 to mar this view. Continued move between 12,800 and 13,300 will keep open the possibility of a rally to 13,780 or 14,198 over the upcoming weeks.
The dollar index that tracks the movement of the greenback against a basket of currencies spiked sharply last week as Euro declined.
This index is in a medium-term uptrend since last August when it recorded the low of 73.6. But it needs to move above 82 before we can assume that a sustainable rally is in progress.