Index Outlook: Market in a state of flux

It was a dull and lacklustre week on the stock market with the Sensex ending almost flat after treading water for most part. The meltdown in commodity prices and the pending decision on fuel price hike influenced movement in the early part of the week. The results of the Assembly elections buoyed the sentiments on Friday as the trading fraternity decided that it has positive implications for the ruling UPA.

Volumes were very low in the early part of the week though it picked up towards the weekend. Surprisingly, FIIs were buying selectively in the early part of the week but they turned net sellers on Friday, the day the Sensex bounced 200 points. Open interest is edging higher towards Rs 1, 40,000 crore. The index put call ratio below 1 suggests that the mood is veering towards the positive with most bears closing their shorts at these levels.

Commodity prices and economic data will be closely tracked next week too to give some direction to stock prices. Some relief can be expected with the onset of monsoon towards the end of May. Corporate results trickling in will also make up an interesting side-show.

Oscillators in the daily chart are moving sideways but in the negative zone. The 10-week rate of change oscillator is critically positioned on the zero line, on the verge of declining in to the bearish region. Weekly relative strength index is also moving deeper in to bearish zone. Interestingly, oscillators in the monthly chart are also pointing lower while perched in the neutral zone.

This implies that if the index moves any lower from current levels, the long-term picture could also get impacted negatively. The sideways move recorded last week has not altered the short and medium-term trend in the index. Both the short as well as the medium-term trends in the index are currently down

As we have been explaining over the past few weeks, the medium-term trend in the index appears weak since it is possible that the third leg of the down-move from November 2010 peak is currently unfolding. This wave has the targets of 17,761 and then 16,493. A strong move above 19,800 is needed to make the medium-term view positive and pave the way for rally to the previous lifetime high.

The sideways move being witnessed since May 5 appears to be a pause in the short-term trend that commenced at the April peak of 19,811. Immediate resistances for the index are at 18,747, 19,005 and 19,109. The Sensex is yet to move beyond even the first resistance. If it struggles to do so next week as well, there is the possibility of a sharp decline to 17,792 or 17,774. If this zone is crossed, the next target zone for the index is between 17,300 and 17,450.

In other words, the odds are currently piled in favour of the bears and it appears a little too soon to presume that a bottom is in place. Investors can start buying only on an emphatic close above 19,100.

Nifty (5,544.7)

Nifty too whipsawed in a narrow band last week before ending the week seven points lower. The medium-term view on the index remains unaltered. It is highly likely that the third leg down from the peak of 6,338 is in progress. This wave can take the index down to 5,332 or 4,954. This view will be negated only on a firm close above 5,950.

Short-term resistances are at 5,638, 5,690 and 5,743. If the index continues to struggle to move above the first resistance, it would be a cue for initiating fresh short positions. It is, however, possible that the index remains in this sideways range for few more sessions before making the next move. Therefore, it would also be more prudent to wait for a move below 5,440 before initiating fresh short positions.

Short-term downward target is 5,348. Since the target coincides with the March 21 trough, traders should watch out with short positions around this level.

Global Cues

Global benchmarks continued to be volatile led by another bout of selling in commodity prices. Most indices extended the losses recorded in the previous week. CBOE volatility index did not move past the resistance at 19 but it did not decline sharply either, implying that traders were not too worried about a meltdown just yet.

European stocks were weak due to the ongoing troubles in Greece. DJ Euro STOXX 50 ended 58 points lower implying that the medium-term correction that began in February continues to be in force.

Most Asian indices however recovered from lower levels to close slightly in the green.

The Dow was also choppy, moving in a range between 12,540 and 12,800. The short-term correction that began on May 2 continues to be in force and can drag the index lower to the zone between 12,350 and 12,400. The short-term trend will turn negative only if the index closes below this zone. The medium-term uptrend will be under threat on close below 11,640.

The dollar index traded continued to make headway. It faces key hurdle at 76.3 that is just ahead. Close above this level will imply that a sustainable medium-term bottom has been formed at 72.86 and that is not good news for commodity prices or for the emerging market equities.