Index Outlook: The charge of the bull brigade

It was a double-treat for the denizens of Dalal Street last week. Not only did the Nifty clamber above 8,000, the Sensex decided to emulate its peer by moving above the 27,000 mark too. Both the indices have closed the week beyond these milestones, much to the delight of the investors.

But with the rally comes doubt and anxiety and the oft-repeated question — when will the correction start?

No one really knows the answer. But it needs to be remembered that corrections can be of two kinds — one, where stock prices dive sharply in a short period and, two, where they move sideways for extended periods. The Sensex and the Nifty have been in the second kind of correction since June. The breakout, if it sustains next week, can take the indices a little further from these levels.

Traders are advised not to fight the trend by taking a contrarian short position before a trend reversal is confirmed.

The ongoing rally in global markets is also helping Indian equity markets. Foreign portfolio investors were going a little slow with their equity market purchases in September, but they have ploughed in $13.7 billion into equity so far this year.

The appetite for emerging market equity among foreign investors too continues to be robust.

According to EPFR Global, a global fund tracker, commitments to Emerging Markets Equity Funds, hit an 82-week high last week. This is the 14th week of net inflows in this category in the last 15 weeks.

Economic numbers from India continued to send mixed signals. Output of eight core industries rose at a slower 2.7 per cent in July compared to a year ago, showing that industrial production has not really gained traction. There was a decrease in the CAD from 4.8 per cent of GDP a year ago to 1.7 per cent in the June 2014 quarter. But this decline is due to the effect of high base.

Sequentially, the CAD, in absolute terms, has increased from $1.2 billion in March to $7.8 billion. Services PMI too declined to 3-month low in August.

The Sensex is in an indomitable mood. It managed to hold on to the gains made in the early part of the week to close the week 388 points higher.

The week ahead: The index is pausing over the last two sessions. Immediate supports are at 26,683 and 26,492. Short-term investors can play long as long as the first support holds.

Targets on a break above 27,225 are 27, 436 and 27,831

Medium-term trend: The Sensex has managed a break past the medium-term resistance at 27,000.

It is yet to be seen if it is able to sustain above this level.

If the index gives way early next week, it needs to close below 26,314 before the medium-term trend can be said to be at risk. If it continues soaring higher, next medium-term target is 28,400.

The Nifty too managed to close well above the 8,000 mark last week.

The week ahead: Movement over the past week indicates that the index wants to forge ahead in the short term.

Immediate upward targets are 8,214, 8223 and 8,244. In other words, you need to be careful between 8,200 and 8,250.

Target beyond 8,250 is 8,328.

Supports for the week are at 7,966 and 7,863. Short-term traders can hold their long positions as long as the first support holds.

Medium-term trend: The medium-term trend is turning bullish with the move above 8,000. But the index needs to sustain above this level for some more time for us to confirm a breakout. Next medium-term target is 8,500.

Investors need to worry about the medium term only on a decline below 7,500.

Most global indices held on to their gains last week. European stocks surged after the ECB announced a stimulus package.

The DAX, the CAC and the FTSE recorded strong gains last week. The DJ Euro STOXX 50 index rallied 3 per cent and is moving close to its recent peak at 3325.

The formation in the Dow is similar to the Sensex and the Nifty. It is moving in an extremely narrow band at higher levels. It appears poised for a break upward to 17,830.

Most Asian indices including the Shanghai Composite ended the week on a strong note.

Nymex crude fell to a low of $ 92.7 last week. It has a strong support around the $90 region where it can halt.

But a further slide can take crude to $85. But the rupee needs to be closely watched.