Index Outlook: RBI to dictate market’s movement: Business Line

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The Indian stock markets have begun the year on a high note with the Sensex and the Nifty gaining 6 per cent in January. The indices have also managed to scale new highs.

But unlike in the past when most global equity markets moved in tandem, there is a marked variation in the equity market behaviour in different regions.

For instance, the DJ Euro STOXX index, the European benchmark, gained 6.5 per cent in January, buoyed by the ECB’s stimulus. The Dow and the S&P 500, on the other hand, are down around 3 per cent, as American investors began worrying about the negative impact of a strong dollar and slowing external environment on company earnings.

Shanghai Composite Index that had gained almost 60 per cent between July and December last year vacillated at higher levels and closed almost unchanged.

It is therefore apparent that the global investors are deciding on the investment in each region depending on the prospects of that country. This bodes well for India that has relatively strong growth numbers, falling inflation and is at the beginning of a down-cycle in policy rates.

Interest rates and inflation will be in focus this week as the Reserve Bank of India unveils its monetary policy statement on Tuesday. While another rate cut appears extremely unlikely, the language he uses to define his stance on policy rates for the rest of the year will be keenly watched by the investors.

Oscillators in the daily chart are beginning to droop, though they continue to feature in the positive territory. Weekly oscillators are however appearing positive. The price rate of change oscillator in the weekly chart is bouncing off the zero line after displaying negative divergence since last July.

The moving average convergence divergence oscillator in the weekly chart is also attempting to reverse in the positive zone.

Oscillators in the monthly chart too are quite bullish; implying that there is no threat to the long-term trend in the index. The bullish engulfing candle in the monthly candlestick charts of the Sensex and the Nifty denotes a strong underlying uptrend.

Sensex (29,182.9)

The Sensex hit a life-time high of 29,844 before reversing lower to form a giant bearish engulfing candle in the daily chart.

The week ahead: While Friday’s session would have been harrowing for most, it is not time to throw in the towel yet. Immediate supports for the index are at 28,858 and 28,657.

Short-term investors can buy in declines as long as the index trades above these levels. If the index bounces off either of these levels, it will mean that it is readying to hit new highs again.

Key short-term support is however at 28,000. Presence of the 50-day moving average at this level makes it an important level to watch out for. Short-term trend will reverse lower only on a close below this level.

If the index opens the week on a positive note, immediate target is Friday’s high of 29,844. Target beyond this level is 30,359.

Medium-term trend: The medium-term trend in the index is under no threat yet. The movement next week will give us clues about the pattern that is evolving. If the index manages to hold above 28,000, it will mean there can be yet another thrust upward that can take the index towards 32,000. We however stay with our view that we are in the final stages of the move that began in August 2013. While the Sensex can move a little higher from here, a medium-term correction is around the corner that will result in a choppy movement for a protracted period.

Nifty (8,808.9)

Nifty too recorded a sharp decline on Friday, wiping off the gains made in the early part of the week.

The week ahead: The bearish engulfing candle recorded on Friday implies that the short-term trend is down. But the index has immediate supports at 8,720 and 8,650. If the index manages to hold above this level, it will mean that it will soon hit a new high. On the other hand, decline below these supports will take the index to the next key support at 8,425. Presence of the 50-day moving average at this level adds to the importance of this level. Short-term outlook will turn negative on a close below this level.

Immediate upward targets, if the index opens on a positive note are 8,996 and 9,170.

Medium-term trend: The medium-term trend in the Nifty stays positive. The index could move a little further in the early part of the year, as we have been reiterating. Targets beyond 9,000 are 9,290 and 9,405. But we are nearing the end of the wave that began from the August 2013-low.

We could therefore soon experience either a swift and deep correction or a shallow and long-drawn correction. The medium-term view stays positive as long as the index trades above 8,000.

Global cues

It was a mixed week for global indices. Investors in the US are worried about economic growth, despite the Fed’s bullish prognosis. The Dow Jones Industrial Average closed 507 points lower.

But the index is holding above the short-term trend-deciding level of 16,743. This level needs to be breached to indicate that the short-term trend is reversing lower.

Greece General Share Index hit yet another multi-year low after the Syriza took over the governance of the country. The Index is however still above the June 2012 low of 471, which is a long-term support for this index.