Index outlook: A correction round the corner? :: Business Line

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The market is all set to open on a buoyant note this week. With the possibility of a Grexit from the Eurozone staved off for another four months, the Dow, S&P 500 and the Nasdaq hit record highs on Friday.

Since other markets were not trading when the deal was reached, they are likely to play catch-up on Monday morning. Stocks in India struggled to move higher last week, partly due to the stalemate in Greece. With Greece’s creditors agreeing to extend the bailout for four more months, investors can now rest easy for a while.

But even if the market rallies in the early part of the week, it would be best for short-term investors and traders to divest their short-term positions in this rally. Since stock market reactions are difficult to predict, it is best to stay away from the market for a week if you are a trader and watch the Budget jamboree from the sidelines. You can jump in next week, after the trajectory of equity prices is apparent.

Volatility is also likely, ahead of the expiry of February derivative contracts on Thursday. If traders decide not to roll over their long positions to the new series, it can drag down prices.

From a medium-term perspective too, the rally appears stretched. As we have been reiterating, the indices could move a little higher from the current levels, but a long-drawn correction is round the corner. Despite the Sensex and the Nifty gaining 45 per cent since the beginning of last February, a significant medium-term decline has not been seen in this period.

The disappointing December quarter earnings and the Government’s inability to get key Bills passed by both Houses of Parliament are making investors restive. Foreign portfolio investors have been net sellers in many of the sessions last week.

Against this background, even if Jaitley delivers a sound Budget that addresses the key issues with the economy, the market can find something to dislike in the document to beat up stock prices.

Long-term investors, however, need not worry about these gyrations. The long-term trajectory is firmly pointing upward and there is no threat to the Sensex unless it falls below 21,000 and the Nifty below 6,300. If a correction does set in after the Budget, it will provide opportunity to long-term investors to buy their favourite stocks.

Daily oscillators are ambivalent, indicating that there could be a movement in either direction. Weekly oscillators have been in a downtrend since late January. There is also a negative divergence in the graph of weekly oscillators.

This implies that despite indices drawing close to their previous highs, the current uptrend lacks inherent strength.

Sensex (29,231.4)

The Sensex moved sideways with a positive bias last week to close 136 points higher.

The week ahead: The Sensex can move in a wide band next week since the market is open next Saturday for the special Budget session. The range that is possible next week is between 27,800 and 31,500.

A gung-ho start on Monday can take the index higher to 29,844 and then to 30,129. If the rally continues beyond the initial sessions of the week or if the Budget makes participants euphoric, the rally can extend up to 31,419.

Supports that short-term investors need to watch out for are at 28,044 and then 27,811. Fresh purchases should be avoided if the index declines below 27,800. Next downward target will be 26,470. The index has good support in the band between 26,000 and 26,500. The short-term trend will be under threat only if the index goes on to close below 26,000.

Medium-term trend: There is no threat to the medium-term outlook of the Sensex yet. The index can attempt to move past the 30,000 mark to 30,900 or 31,419 in the coming weeks. But it is best to stay cautious as one leg of the long-term up-move could be coming to an end.

The medium-term trend in the index will turn negative only if the index closes below 25,120.

Nifty (8,833.6)

The Nifty closed flat last week, after the sharp decline on Friday.

The week ahead: The Nifty is in a short-term uptrend. If the opening is on a strong note, the index can rally to 8,996 or 9,045 in the near term. Traders are likely to get nervous as the index nears the 9,000 mark; there could be some volatility. If the Budget is extremely positive and the market gets euphoric, the index can rise to 9,400 next week.

Immediate supports for the index are at 8,500, 8,470 and 8,430. Fresh purchases should be avoided on a close below 8,430. Next downward target is 8,065. This becomes possible if market turns very bearish after hearing the Finance Minister.

Medium-term trend: We retain the positive medium-term target for the Nifty. But investors need to watch their step as we could be nearing critical medium-term peak.

Global cues

Global benchmarks closed on a strong note last week, helped by the deal on Greece struck on Friday. European benchmarks surged on Friday and the DJ Euro STOXX 50 closed the week 1.2 per cent higher.

The Dow Jones Industrial Average and the S&P 500 closed at new lifetime highs. The Nasdaq composite closed at yet another multi-year high, inching close to the 5,000 mark.

Since the Dow has already moved to our first target at 18,103, the index can attempt to move on to the next target at 18,426. The short-term trend in the index will turn negative only if the index goes on to close below 18,100.

Many Asian indices such as the Jakarta Composite Index, Shanghai Composite Index, and Straits Time Index closed with strong gains last week.