Index Outlook — Sensex at the crossroads

Sensex (15,922.4)

The Sensex continued running on the treadmill for the third consecutive month, huffing and puffing but not getting anywhere. August was particularly exasperating with the index moving tantalisingly close to the 16,000 mark on many days without making a serious effort to move above it.

Bulls can, however, derive satisfaction from the fact the week ended on a triumphant note with the Sensex once again crouched and ready to spring over the 16,000 threshold.

Comatose front-line stocks made traders shift their attention to mid and small-cap stocks. BSE Smallcap Index gained 8 per cent last week accompanied by some astonishing moves in lesser known stocks. However, BSE mid and small-cap indices have retraced less than half of the losses made in the previous decline while the Sensex is close to 61.8 per cent retracement which gives them more head-room.

FIIs turned net buyers once again last week. Expiry of the August series passed smoothly indicating the absence of nervous shorts in the market.

The Sensex has gained just 1.6 per cent in August so far. Monthly rate of change oscillator has reached levels last seen in April 2006 indicating that prices are getting overbought even from a long-term perspective. But these oscillators can remain in overbought zone for many months before a correction materialises. Weekly oscillators that were poised on the verge of entering the negative zone have recorded a small upward reversal.

The intermediate term up-move from the March lows continues to be in robust health. Simple trend following techniques give a positive outlook and extrapolating the move from 8,047 gives the minimum target of 17,886 for Sensex. However, we continue to advise caution because the zone between 16,000 and 17,000 is a potent minefield that can give investors a nasty surprise.

The up-move from 13,219 could be the fifth and final wave of the move from March lows in which case it can terminate at 16,104 or at 17,373. The other count that needs to be kept in purview is that of a terminal corrective that makes the index vacillate in a range between 13,000 and 16,000 before the entire up-move from March low ends. It also needs to be borne in mind that the Sensex is drawing close to the 16,180 mark that is the 61.8 per cent retracement of the down-move from 21,206 peak.

We remain ambivalent regarding the short-term movement in the Sensex. We had outlined three short-term trajectories for the index in our last column. The quandary has not been resolved yet. Sensex has moved close to 16,000.

A reversal from here can cause a decline to 14,700 or 14,244. But a break-out above 16,000 can cause the index to move on to 16,180, 16,312 and 16,459. Supports for the week are 15,500 and 15,200. Short-term investors can buy in declines as long as the first support holds.

Nifty (4,732.3)

Investors celebrated as the Nifty recorded a weekly close above the 4,700 mark. But as we have been reiterating, the index is in a range between 4,400 and 4,700 in the short-term. A reversal from these levels can cause a decline to 4,400 again. However, the short-term trend will turn negative only on a close below 4,230.

Interestingly, 61.8 per cent retracement of the down-move from 6,357 in the Nifty is at 4,898 that is a little farther than 16,000 at this point. That would be the medium-term target on a break-out. Short-term pattern is however positive and indicates a surge higher to 4,838 or 4,954.

Short-term supports are at 4,600 and 4,500. Traders can buy at declines as long as the index holds above the first support.

Global Cues

Global benchmark indices paused at higher levels last week while few recorded marginal gains. CBOE Volatility Index held steady between 22.5 and 26 indicating that investor sentiment continues to be cheerful and optimistic.

European indices led by the FTSE put up a strong show. DJ Euro STOXX has just neared its key medium-term resistance level at 2845. Rally beyond can result in another 10 per cent gain in this index.

Asian indices did not make any headway though some closed with marginal gains. What is worrisome is the renewed weakness in Shanghai Composite that failed to get past the resistance at 3,000 indicated last week. However a close below 2,800 should be seen before panic buttons are pressed.

The Dow managed to hold resolutely above 9,400 though the movement was extremely narrow. It closed the week with meagre 38 points gain. Momentum is sagging and a pull-back appears to be in the offing in near future. But if the index moves higher, next target would be 10,300.

Similar movement was witnessed in the S&P 500 too that moved sideways above the resistance at 1020 and closed with a doji in the weekly chart denoting indecision.

CRB Index that tracks commodity prices is moving in a band between 400 and 430 since the beginning of August. There can be one more spurt in this index to the next resistance level of 445.

— Lokeshwarri S.K.