Tuesday, July 14, 2009

Technical Analysis - Index Outlook 13-17 July 2009

Index Outlook — Poised on the brink
Sensex (13,504.2)

The Union Budget for 2009-10 was definitely not scary enough to make equities fall off a cliff the way they did. Though the packaging of the Budget and missing road-maps caused a great deal of consternation among market participants, the 1,400 points weekly loss in the Sensex appears to have been largely caused by unwinding of short-term positions built in expectation of a post-election surge in stock prices.

Volumes tapered off towards the close of the week. Data released by SEBI reveals that foreign institutional investors have bought $603 million in the four sessions from the Budget day.
Domestic institutional investors too were largely net buyers last week.

Retail investors seem to have borne the brunt of the post-budget selling.

A turnover of Rs 96,000 crore, recorded in the derivative segment of NSE on Monday indicates that leveraged positions built up in anticipation of a post-Budget rally could have been the primary factor that pushed stock prices lower on the Budget day.
The 10-day rate of change (ROC) oscillator has declined into negative zone and the 14-day relative strength index is positioned at 38.

Both these readings reflect a bearish short-term outlook. That the Sensex has recorded a close below its 50-day moving average is also a negative.
But investors can take heart from the weekly momentum indicators that are holding in the positive zone.

Interestingly, monthly ROC has risen from the negative zone and is poised on the median line. The inference is that the movement of Sensex over the next few weeks will determine the long-term direction that the index takes.
The third wave of the down-move from 15,600-peak started on the Budget day and this wave has the downward targets of 13,513 and 12,553. Sensex moved to the first target on Friday. There are a cluster of supports around the 13,500 level provided by the trough formed on May 26 and the ceiling of the post-election result gap.
A short-term bounce is possible here that takes index to 14,000. But failure to record a strong close above 14,000 would mean that the weakness would continue in the short-term.

We stay with the view that the medium-term trend will turn conclusively negative only on a close below 13,300. The yawning gap between 12,219 and 13,479 will result in the decline accelerating once the index closes below 13,300. Fibonacci retracement of the up-move from March lows give us the medium-term targets of 12,730, 11,840 and 10,950 in the event of a protracted down-move.
A brief review of the long-term outlook is warranted at this stage. We have adhered to the view that the up-move from March lows was a counter-trend rally in a long-term down-trend (bear market rally in common parlance and B wave in E-wave terminology).
A strong weekly close above 16,200 is needed to alter this view. The behaviour of market participants in May and June had all the hallmarks of the B wave and patterns in the charts of other global indices also support this view. Investors holding short-term positions need to tread carefully at this point since the C wave of the long-term down-trend could have commenced from the 15600 peak. This count will be confirmed on a strong close below 13000. The force and ferocity of the C wave downward is known to all. But bulls need not throw in the towel just yet. A strong rebound next week will mean that the B wave can extend for a few more weeks and maybe help Sensex reach 16,000.
Sensex closed on a very weak note on Friday. But a short-term rebound can take the index to 14,059 or 14,455 early next week. Key resistance zone for the week would be between 14,000 and 14,250. Failure to move beyond this zone will result in the index heading lower towards 13,346 or 12,730 in the short-term.

Nifty (4,003.9)

Nifty moved to the low of 3,976 on Friday. Targets of the down-move from 4,693 peak are 3,930 and 3,590. Since Nifty is close to the first target, a short-term rebound is possible that takes the index higher to 4,181 or 4,296. Short-term traders can use rallies to these levels to initiate fresh short positions. Medium-term targets for the Nifty based on retracement levels are 3,876, 3,624 and 3,371.

A close above 4,450 is needed to make the medium-term view positive again for Nifty.

Global Cues
Global equities began correcting in earnest last week; most of the major indices gave up between 3 to 4 per cent. Asian indices were however resilient, indices such as Jakarta Composite, KLSE Composite, Seoul Composite and so on closed near the upper end of their medium-term trading ranges. CBOE VIX spiked to an intra-week high of 33 before closing at 29 implying that investors are getting just a trifle edgy.

The Dow moved in line with our expectation, declining below the first target of 8,198. Close below 8,200 is a negative from a short-term perspective and implies that the index could decline towards the next target between 7,960 and 8,000. But we stay with the view that a re-test of March lows becomes a possibility only on a strong close below 7,800.

Commodities led by crude pulled the CRB index lower by almost 3 per cent. This index has retraced over 40 per cent of the rally from the March lows and the speed of the current decline implies that the long-term trend in commodities continues to be down.

— Lokeshwarri S.K.