Index Outlook. Time to watch your step

Bulls were on the rampage on Friday, lifting stocks to new life-time highs and helping the BSE market capitalisation to cross the ₹100 lakh crore mark.

The mood could however turn a little circumspect this week, ahead of the monetary policy. The September quarter GDP growth was also nothing to cheer about.

The fate of the ongoing rally hinges on the Reserve Bank of India’s next move. If the RBI obliges and cuts policy rates, the Sensex will get past 29,000. But if the central bank continues with its current stance of waiting for structural decline in inflation, there could be a sharp sell-off next week.

Indices moved sideways in the early part of last week as the bulls and bears battled it out in the expiry week. But market broke free of its shackles on Friday. It was the sharp decline in crude oil prices — after OPEC decided to squeeze shale gas producers in to a tight corner — that made stocks soar sharply towards the end of the week.

All eyes will now be on the price of crude. If we consider the chart of Nymex crude futures, the most significant long-term support is at $64. This occurs at 61.8 per cent (Fibonacci) retracement of the move from the 2009 low of $36 to the 2011 peak of $115. If oil breaks below $64, a decline to $36 is possible, technically. Since a fall to $36 is inconceivable at this juncture, the decline should find a base in the zone of $60 and $65.

Oscillators in the daily chart are moving sideways in the positive zone. Sell signals are also beginning to emerge in some oscillators, implying slowing momentum that can eventually lead to a fall.

Weekly oscillators however continue to be strong. The medium-term trend therefore continues to be up. It has been a breathless run for our market since this February with consecutive up closes in the monthly chart, interspersed with two doji candles.

The Sensex vacillated in a narrow range in the first four sessions before the strong surge on Friday that took the index 359 points higher.

The week ahead: As explained in the last column, a running correction was forming in the Sensex and the Nifty since November 3. The indices have broken out into the next leg of the uptrend now.

This appears to be the fifth wave from the October 17 low. The targets of this wave are 28,701, 29,047 and then 29,187. Since the index is close to the first target, some degree of caution is needed here. A break beyond 28,700 can take the index towards 29,047.

But there is a high probability of a wobble, as the index nears 29,000.

It is also equally possible that the mood turns cautious, ahead of the monetary policy and the index drops lower. Supports in that case are at 27,735 and 27,000. Traders can continue to buy on declines as long as the index trades above the first support.

Medium-term trend: The medium-term trend stays strong in the Sensex. But it could be nearing the end of a five-wave formation from the August 2013-low. The targets for this move fall between 28,270 and 29,717.

Since the first target has already been achieved, a reversal is possible anytime from this point. Key medium-term support is at 27,354. The recent peak was formed at this level. The 50-day moving average is placed here and it is also a short-term Fibonacci support.

The Nifty too rallied sharply on Friday, helping the index close 94 points higher.

The week ahead: The lack of momentum and negative divergence in daily oscillators shows that a decline is in the offing. The final wave from the October 17 low of 7,723 could be unfolding now. This wave has the targets of 8,598, 8, 706 and 8,750.

Since the index hovers around the first target, investors should tread cautiously. A strong start on Monday (quite unlikely, given the monetary policy overhang and GDP numbers) can take the Nifty above 8,700. Supports for the week are at 8,429, 8,320 and 8,300. Fresh long positions should be avoided only on a close below 8,300.

Medium-term trend: The medium-term trend for the Nifty stays strong. But the index is nearing critical long-term targets.

If we consider the move from August 2013 low at 5,118, the final stages of this move appear to be in motion. This wave has the targets of 8,585, 9,026 and 9,541. The first target of the longer-term wave has also been achieved. A reversal is therefore possible.

However, if the rally continues, the Nifty will be reaching out to the 9,000 mark soon.

Global indices edged slightly higher last week. The Shanghai Composite Index posted the strongest gain among global indices, up 8 per cent. Investors seem to have flocked to Chinese stocks following the interest rate cut by the Chinese Central bank. There appears to be a lesson for Raghuram Rajan here.

The Dow was however a little subdued last week, recording a mild 18 points gain. Supports for the index are at 16,652 and 16,000. Our medium-term target for this index stays at 18,550, if the index holds above 17,350.