Index Outlook: Holding ground, aiming higher :Business Line,

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Sensex (16,933.8)

Greece and its Olympian difficulties cast its shadow on the global equity markets in the first half of last week. But buzz that China could step in to buy Italian bonds and soothing noises from ECB, Federal Reserve et al staved off the issue….to probably next week.

Weak industrial production numbers and higher headline inflation kept market participants on the edge. But our market was surprisingly nonchalant about the latest policy-rate hike by the RBI. The Sensex closed the week flat after threatening to dive below 16,000 in the early part of the week. The postponement of the ONGC follow-on offer has also been received with relief on the street due to the positive effect on liquidity.

Investors would look overseas again next week as the FOMC meets to mull over its monetary policy. A workable solution to pull European nations out of the present quagmire can also act as a catalyst for a bounce.

Volumes were subdued in the first four sessions but picked up on Friday as stock prices did a jig following the monetary policy announcement. Index put call ratio also declined on Friday implying that traders have closed their short positions after seeing market's lukewarm reaction to yet another rate hike. Open interest is nudging Rs 1,36,000 crore, but it is still way below the high of Rs 2,00,000 crore recorded in the last quarter of 2010.

Despite the drama surrounding the Sensex' decline below 16,500 and ascent above 17,000, the weekly range was same as the previous week. The index gained 9 per cent from its 15,765 low and is moving sideways thereafter. The trends along all time frames remain unaltered. The short-term trend is up, the medium-term trend is down and the long-term trend is up.

Relative strength index in the weekly chart is moving up from over-sold zone but the weekly rate of change oscillator is still in the negative zone reflecting the weak medium-term trend. Short-term oscillators are moving sideways in the neutral zone reflecting an ambivalent near-term trend.

Up close for three consecutive weeks is good news. Simple trend following methods would assume that the short-term trend will continue higher. If we extrapolate the move from 15,765, we get the immediate targets at 17,267. As we have been indicating, the area between 17,050 and 17,300 is the critical short-term resistance that traders and short-term investors need to keep an eye on.

Reversal from this zone will keep the index turbulent in the range between 16,000 and 17,300. However targets on a close above this impediment are 17,712 and 17,820. Short-term view will deteriorate only on a strong close below 16,300.

That was the near-term view. The medium-term trend is still sloping down and the rally from August 26 trough has not progressed enough to ensure that the worst is over. That the rally is struggling to cross above 17,000 implies that bears continue to have the upper hand. The index will need to move above 17,800 to signal that the medium-term trend is recovering.

Despite the fact that the Indian market is in a corrective mode from last November, while the rest of its global peers began declining seriously only in August, our market appears resilient when the retracement of the rally from 2009 trough is considered. The Sensex has retraced only 40 per cent of this up-move while European and some Latin American benchmarks have retraced 61.8 per cent or even more.

As we have been reiterating, halt around the 16,000 mark will be positive from a long-term perspective and will mean that after prolonged (maybe a couple of years or more) move in a broad range between 16,000 and 21,000, the index can break higher.

Nifty (5,084)

The Nifty hit the intra-week low of 4,911 on Monday before moving higher. The short-term trend in the index continues to be up and extrapolation of the move from 4,720 low gives us the immediate target of 5,189. The entire zone between 5,100 and 5,200 will be the critical resistance for the index in the week ahead.

Failure to move above it will bring the index lower to 5,000 or 4,900 again. Conversely, break above 5,200 can take the index higher to 5,350 or 5,361.

The medium-term trend in the index continues to be down though it is reversing higher from important long-term support level. The index will have to record a strong close above 5,340 to signal that it is on the way to sustainable recovery. Else the volatility will continue.

Global Cues

After an initial quake in the early part of the week, most global markets recovered towards weekend as fears of an imminent Greek default abated. European benchmarks moved higher after a long hiatus this week.

The DAX formed a bullish engulfing pattern on the weekly candlestick chart after testing its key long-term support at 5,137.

Shares in Asia did not have it that easy and most Asian benchmarks closed with weekly losses.

CBOW VIX spiked to 43 on Monday when fear was highest about looming collapse of global credit markets. But it receded to end the week at 31 implying that nerves have now settled.

We stay with the view that this index needs to close below 28 to signal that the short-term turbulence is behind us.

The Dow recorded five positive closes to end the week 517 points higher. The index is currently stuck in the range between 10,700 and 11,700 and break-out on either side is required to determine the next medium-term trend.

The higher troughs and higher peaks recorded since the August 9 low is however a positive