Index outlook: Uneasy lies the market

Stocks are currently pausing at an important junction from a medium-term perspective. The 28,500 level in the Sensex and the 8,650 hurdle in the Nifty need to be crossed before the bulls can lift the market to a new peak.

But it is obvious that the indices are unable to garner the strength to accomplish that feat. Both the benchmarks have not gone anywhere over the last month, vacillating in a band just below these hurdles.

This kind of lackadaisical move reflects lack of conviction among market participants. The first quarter earnings have not been anything to write home about. Despite a slight expansion in operating margins — thanks to decline in raw material costs — revenue and profit growth have been dismal. Monsoon continues to be whimsical; cumulative rainfall received up to August 7 has been 7 per cent below long period average. The logjam at the ongoing parliamentary session does little to improve sentiment, as the country needs fast-paced reforms to get investment going again.

The RBI has rightly adopted a wait and watch mode in its monetary policy, especially since the Fed is on course to begin monetary tightening next month. Cutting interest rates further before knowing the reaction of financial markets to that event would be far from prudent. But then, despite a bout of volatility at the announcement of the Fed taper, financial markets did behave in a mature fashion as the Fed would scale down its stimulus programme. Let us hope that the reaction of financial markets this time will be just as placid.

Given these headwinds, it will be very surprising to see if the equity market is able to climb to a new high, just yet. The path of least resistance is therefore downward.

But the movement of our market over the last couple of months denotes inherent strength; buyers appear willing to add to their holding at lower levels. Such buying interest will help prevent a deep crash and the benchmarks are likely to form a base around, or a little below, the June lows.

The Sensex and the Nifty have managed to climb above the 50- and 200-day moving averages again. But the indices seem to lack strength if the small bodies of the candles formed over last week are taken into consideration. Again, as mentioned above, the indices have been stuck in a range for more than a month now. So, not much should be read into the mild buy signals emerging in the daily MACD and ROC oscillators.

Weekly oscillators are underlining the point made above, that are at a key medium-term deciding point. The oscillators are attempting to rear their heads above the neutral line. But they can move into the negative zone if a downward reversal takes place.

The Nifty moved sideways with a slightly positive bias over the past week. But the net gain for the week was just 31 points.

The week ahead:  The sideways move has retained the short-term view in the index. The Nifty is yet to break above the key resistance in the band between 8,600 and 8,650. The short-term trend is up and a break above 8,650 can take the index to 8,757 or 9,027.

But as explained above, the significance of the resistance around 8,650 increases chances of the index reversing from these levels to hurtle lower towards 8,400 or even lower.

Fresh longs are therefore not advised below 8,500. Next supports are 8,430 and 8,323.

Medium term trend:  There is no change in the medium-term outlook as well. Downward reversal from 8,650 level will bring on the C wave down from the 9,119-peak. This wave has the targets of 7,921 and 7,471.

It is quite possible that the next wave down halts around 7,920 again, setting the stage for sideways move between 8,000 and 9,000 for few more months. Long-term investors need to start worrying only on a break of the 7,920 level.

The Sensex too managed to trudge higher and closed with a marginal 121 point gain last week.

The week ahead:  The index is yet to get past the resistance band between 28,400 and 28,600. Investors ought to stay wary as long as the index trades below this band.

Reversal from here can pull the index lower to 27,179 over the short term. The view over this time-frame will however be roiled only on a close below 27,179. That will signal the resumption of the downtrend that commenced from the 30,024 peak. This move has the potential to drag the index 26,300 or even lower.

It was a relatively calm week in global market with the upheavals in Greece and China subsiding; albeit temporarily. Most global benchmarks moved sideways and ended on a flat note. The CBOE volatility index hit a 11-month low at 10.9, reflecting complacency among the global investor fraternity.

US markets were however weak with the Dow declining below its short-term support at 17,550. The index will now head towards the 17,037. It needs to be seen if the support around 17,000 holds. If it does, we can see sideways move between 17,000 and 18,500 for few months. Else, a decline to 15,855 will be on the cards.

A tight vigil needs to be maintained on the dollar now. Strength in the greenback is sending commodity prices plunging, in turn affecting prospects of commodity exporters.