Indian stocks continued their audacious climb last week and the Sensex closed with yet another hefty weekly gain. The strength in this rally will, however, be severely tested next week as the earnings announcements gather pace. But since many believe that all the negatives are ‘already discounted’ in the current prices, any positive surprises akin to the Wells Fargo earnings can only give a leg-up to this rally.
Second rung stocks walked away with the laurels last week; BSE Midcap Index closed 7 per cent higher while the Smallcap index gained over 9 per cent. Volumes touched the roof as investors returned to the bourses in droves lured by the rising stock prices. Cash turnover on the NSE on the last two trading sessions was over Rs 17,000 crore whereas the average daily turnover in February 2009 was only Rs 7,800 crore.
It is obvious that stock prices have run-up too fast and the daily momentum indicators are flashing some danger signals. Negative divergence is apparent in the 10-day rate of change oscillator and the 14-day relative strength index is at 73. The implication is that investors should watch their step in the short-term.
Let us step back a little and view the larger picture briefly. Following the decline from the 21206-peak that halted last October, Sensex had been moving in a sideways range. We had assumed that this was a halt before the final leg of the move from January 2008 peak unfolded. However the magnitude of the current rally denotes that one leg of the bear market was completed at the March trough (fifth wave failure) and we are in a counter-trend rally that is correcting the entire decline from last January peak.
The wave-counts, as we have pointed out before, are more lucid in the Dow Jones Industrial Average where the fifth and final wave achieved its target in March 2009.
If this is the ‘B’ wave of a long-term down-trend, first two targets are 11990 and 13000. Halt below either of these levels will mean that the index will spend the rest of the year in a range between 8000 and 13000 as the B wave unfolds in to a protracted sideways movement. It needs to be borne in mind, that according to this count, sharp up-moves such as that witnessed over the past month can be followed by harrowing declines. We will examine other B wave possibilities on a rally beyond 13000.
The short-term trend is positive but since the Sensex is approaching key medium-term resistance levels and momentum is beginning to slacken, investors should take some money off the table. Immediate targets for the current up-move are 10805 and 11600. Since the first target has already been achieved, Sensex can have a shy at the second target. The 200-day simple moving average present at 11340 is also a formidable resistance in the near-term. Supports for the week would be 10393 and 10060. Short-term investors should avoid fresh purchases on a decline below the first support. Medium-term view will turn negative only on a close below 9500.
Nifty recorded the intra-week peak at 3401 and ended with a 131 points gain. The doji formation in the daily chart and the halt below the 200-day moving average at 3441 implies indecision in the short-term. A short-term correction can pull the index down to 3234 or 3131. Fresh longs should be avoided on a decline below the first support. Medium-term view will, however, turn negative only on a close below 3000.
Immediate targets for the current rally are 3326 and 3450. If there is a vertical break-out above 3450, next target would be 3911. However, targets for the B wave of the long-term down-move from the 6357 peak are 3680 and 4050. These could be the ceiling for the index for this calendar.
Equity markets did not make any headway last week, but they did not cede any gains either. Most global equity indices closed with slight gains or losses. CBOE volatility index recorded a strong move below 40 to close at 36.5, the lowest closing low in the last six months. The implication of this move is that investors are beginning to believe that the worst of the bear market is behind them.
The Dow was tepid in the first three sessions of the week before retracing all the losses on Thursday. The index is however still testing the resistance at 8100. A break-out above this level will take the index to the zone between 8800 and 9500. Else it can decline towards 7500 again. S&P 500 has, however, broken above the corresponding resistance at 841 and the next target for the index is between 950 and 970.
Many of the Asian markets have put up a strong show in the rally since March. Indices such as Taiwan weighted index, Seoul Composite index and the Hang Seng have gained more than 30 per cent in the current rally. — Lokeshwarri S. K.