INDEX OUTLOOK: Will Sensex pick up steam?

Sensex (17,082.7)

The gloom enveloping financial markets dispersed slightly last week with most global benchmarks moving up smartly. This change in sentiment was however, more due to investor fatigue at reacting to the same set of foreboding news, week after week, rather than these concerns reaching a sudden miraculous solution. But then, that is the way bear market bottoms are formed.

Investors opted to focus on the positives such as stronger than expected retail numbers out of US and thumping show by the domestic technology bellwether, Infosys. This helped the Sensex gain 5.8 per cent and close above the 17,000 mark.

Volumes were nothing to write home about. FIIs turned net buyers, further supporting the optimistic mood pervading the market. Open interest in the derivative segment crept up to Rs 1,26,000 crore as trading interest revived. But the index put call ratio has shot up to 1.55 implying that traders are sceptical about the sustainability of this rally.

The outcome of the meeting of finance ministers from the Group of 20 economies will influence trading in the early part of next week. Domestic market will focus on the deluge of earnings announcements that will flood the street. The rock-bottom expectation from corporate earnings this time could, however, prevent selling prompted by ‘negative surprises'.

The close near the intra-week high has helped oscillators in the daily chart move deep in to bullish zone. The moving-average convergence-divergence oscillator in the daily chart is on the verge of cutting above the zero line. If this feat is achieved, it will signal a reversal in the short-term down trend.

Last week's rally has, however, not yet impacted the oscillators in the weekly or monthly chart. We also have the beginning of a morning star formation in the weekly chart. This is a bullish reversal pattern but it needs to be confirmed by the action next week.

The rally last week has once again taken the Sensex near the upper end of its short-term trading range. As we have reiterated, the index faces a strong hurdle in the band between 17,000 and 17,200. As long as the index trades below this band, it will remain volatile in the band between 15,700 and 17,200. A strong break above 17,200 will give the next short-term targets at 17,448 and 17,845.

The consequence of another reversal downward from the aforesaid hurdle will however, be quite dire. It will imply that the bears continue to hold sway and the index can move lower to 16,590 or 16,267 in the upcoming sessions.

The short-term trend will turn very negative if the index goes on to close below 16,267. Subsequent targets for the index are 15,765, 15,651 and 15,330. Extrapolation of the wave from 19,131 gives us the next downward target at 15,031. This risk will however be mitigated if the index manages to move past the 17,200 in the upcoming week.

To put it simply, investors need to sit on the fence for a couple of sessions to see if the index manages to gather sufficient power to move past 17,200. If it doesn't, this rally will also have to be categorised as a will o'-the wisp.

The Nifty (5,132.3) too managed to move to the intra-week peak of 5,141 that falls within our key medium-term resistance zone between 5,100 and 5,170. The next two sessions will be critical in determining the medium-term trajectory in the index. A sharp rally past 5,170 will take the index higher to 5,230 or 5,350 over the ensuing weeks. The medium-term view will turn positive only on close above 5,350.

But if the index reverses below this level, it will mean that it can move down to 4,980 or 4,880 in the days ahead. Short-term traders can hold their long positions only as long as it trades above the first support. Conversely, short-term trend will turn overtly negative on a close below the second support. Subsequent targets are 4,720, 4,675 and 4,538.

Global Cues

Global markets recorded smart bounces last week, making it among the strongest rally witnessed in the last six months. Some strong economic reading from the US coupled with all the Euro zone nations ratifying the plans for bail-out fund assuaged investor sentiment.

CBOE volatility index closed below the 31-mark for the first time in three months. If this index goes on to close below 28, that will mean that the short-term view has reversed for the better in the index.

The strong surge in Dow on Monday helped the index move above the immediate resistance at 11,500. Next challenge on the higher side is at 11,750 and then at 12,000. The area between 11,900 and 12,100 will be critical for determining the short-term trend in the index since the 200-day moving average is also positioned here. On the other hand, inability to move beyond 11,750 will mean that the index can remain in the band between 10,700 and 11,700 for few more weeks. Such a move will also retain a bearish short-term view for the index.

Asian benchmarks also headed higher for the week. The Shanghai Composite Index reversed higher after falling incessantly since July. The fact that it is reversing from key long-term support at 2,366 is a positive.

It is the sharp downward reversal in the dollar index from its recent peak at 80.4 that is spurring the recent fund flow in to equity and commodities. Key short-term support for the index is at 76.2. Decline below this level will mean the end of the current bout of risk-aversion in financial markets.