Index Outlook: Recovery hinges on the dollar:: Business Line

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The positive sentiment generated by the European Central Bank and the Bank of Japan failed to sustain the buoyancy in sentiments, and the rally in global equity markets once again began to droop last week.

Going ahead, the fate of equity markets hinges on the performance of the dollar and movement of crude oil. The sharp decline in the dollar, witnessed over the past week, needs to hold to enable global equity markets find their feet.

The dollar index is down from 99.9 to 97 in two weeks. If it moves lower, it can give a fillip to commodities as well as riskier asset classes such as emerging market equity.

This sequence is already beginning to play out with some emerging markets such as Indonesia, Thailand and Turkey recording gains last week even as developed markets fell.

It is quite possible for the dollar to fall further, as hopes of aggressive rate hikes by the Federal Reserve in 2016 fade. Last Friday’s selling in tech stocks also indicates that investors are now willing to look beyond US equity and treasury instruments. It is also quite unlikely that the US government will allow the dollar index to strengthen beyond 100, as the US industry and exports are already experiencing pain due to a strengthening dollar.

There is some respite on the liquidity front too. The selling fury unleashed by foreign investors in January when they pulled out close to $1.5 billion, has abated substantially. They were even net buyers in some sessions in February, resulting in net inflow of $89 million so far this month.

Crude oil movement, however, continues to remain unpredictable. As crude oil prices rallied in the second half of January, some stability was witnessed in other markets. But with crude prices declining once again last week, volatility has returned to equity markets too.

The RBI maintaining status quo in its monetary policy last week did not help market sentiment but the Governor cannot be faulted for waiting for the Centre’s move in the Budget due in a few weeks. Macro data continues to send mixed signals and there aren’t too many positives from the December quarter earnings declared so far.

Nifty 50 (7,489.1)

The Nifty went on a roller-coaster ride last week, dipping to 7,350 before recovering to 7,500.

The week ahead: These are testing times for the Nifty. Given the unrelenting fall in January, the confidence of investors is shaken and there will be many who will be selling at every rally, thus capping uptrends.

As the saying goes, the path of least resistance is currently downwards.

The Nifty has short-term supports at 7,350 and 7,250. There are also a series of resistances just ahead at 7,600, 7,675 (50 day moving average) and 7,700. A strong close above 7,700 will be the first indication that the short-term trend is reversing higher.

Medium term: The area around 7,400 is continuing to rein in the fall in the Nifty and that is a positive. A bottom at the current level will mean that the index can move between 7,400 and 9,000 for the next year or two as it builds a base to move higher.

On the other hand, decline below 7,400 can bring on a sharper correction that drags the index to 6,840 or below.

Sensex (24,616.9)

The Sensex declined to 24,187 in the early part of the week before clawing higher.

The week ahead: The index has short-term supports at 24,187 and 23,839. As long as it sustains above the first support, traders can buy in declines. But fresh long positions need to be avoided on a decline below 24,187.

Short-term resistances are placed at 25,000, 25,214 and 25,310. Those who want to play it safe can wait for a close above 25,310 before going long.

Bank Nifty (15,162.05)

The Bank Nifty hit a low of 14,761 and bounced higher last week forming a double bottom. Immediate resistance for the index is at 15,334. The 21-day moving average poised just above will also be a hurdle for the index. Traders can initiate fresh long positions only on a strong move above this level. Next target is 15,683. Strong support for the index exists at 14,761. Fresh longs should be avoided on a close below this level. Next targets are 14,290 and 13,721.

Global cues

It was a disappointing show by global indices that gave back most of the gains over the past two weeks. The CBOE VIX trudged higher in four of the last five sessions, reflecting the nervousness among the trading fraternity. The DJ Euro STOXX 50 is also back at the level recorded recently, reflecting that the markets are not out of the woods yet.

The Dow put up a disappointing show, halting just below the key resistance at 16,400 and reversed lower. Inability to move past this level this week will mean that weakness will return to equity markets. On the other hand, the index needs to move above 17,000 to indicate a short-term reversal.