Index outlook: Looking for a foothold:: Business Line

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It was an insipid three-day week in the stock market with many participants taking a much-deserved break from the clatter of the stock market. The week began on a wobbly note with the Samajwadi Party threatening to withdraw support to the ruling coalition. But stocks stabilised thereafter as resolution of the Cyprus issue brought stability to the domestic and global markets. Benchmark indices managed a positive weekly close thanks to a bout of short-covering ahead of the derivative expiry on Thursday.

The first quarter of 2013 has been quite disappointing for equity investors. The large-cap stocks driven Sensex and the Nifty are down around 3 per cent in this period. The cut is, however, sharper in smaller stocks with the BSE Small-cap Index down 21 per cent and the Mid-cap Index down 13 per cent in this period. This performance is in line with our outlook for 2013 published on December 30, 2012, where we had stated that the long-term trend in small and mid-cap indices continues to be down and if the market turns volatile in 2013, the smaller stocks could see sharper declines.

Volumes in both the cash and derivative segments were subdued in the first two sessions though they spiked on Thursday, the day of the derivative expiry. Open interest on NSE declined to around Rs 85,000 crore as traders unwound their position. Tally of FII net purchases for March has now risen to $1.6 billon.

The market has, so far, not had time to react to the widening current account deficit for the December quarter since the numbers were released after market close on Thursday. Adverse reaction to these numbers could lead to volatility on Monday. Investors will also assimilate monthly sales numbers of the automakers and HSBC India’s PMI data next week. Last quarter earnings and outlook for company profitability for FY14 will also begin domination of conversations.

Sensex (18,835.8)

The Sensex moved sideways in the band between 18,600 and 18,900 last week. As we have been discussing, the Sensex is in the third part of the move that began from 20,203 in January.

This move has the targets of 18,814, 18,263 and 17,711.

Since the first target has already been achieved, it is possible that there is now a rebound.

But the up-move witnessed in the last two trading sessions is not strong enough to help us confirm that the third wave down from 20,203 has ended.

Short-term traders can, therefore, hold their short positions as long as the index trades below 19,000.

Failure to move beyond this level will result in the index sliding once more to 18,267 or 17,814.

But a move above 19,000 will take the Sensex higher to 19,200 or 19,300. These will be the key medium-term trend deciding levels for the index.

As explained before, the medium-term view in the Sensex stays positive as long as it trades above 18,500.

This fits in with the possibility of sideways move between 18,500 and 20,200 for a couple of quarters more before the index attempts to break higher.

Nifty (5,682.5)

The Nifty closed the week with 40 points gain. As discussed earlier, the target of the third wave down from the 6,112 peak are 5,693, 5,522 and 5,350.

We stay with the view that further deterioration will pull the index towards the next target zone between 5,500 and 5,550.

For the near-term, we are not yet certain if the third leg of the move from the 6,112-peak is complete or not. Traders can continue to play short till the index trades below 5,750.

That can also serve as the stop-loss for short positions. Reversal below this level can drag the index lower to 5,519 or 5,383.

Conversely, move above 5,750 will mean that the Nifty is moving towards 5,790 or 5,832.

Our medium-term view stays positive as long as the index trades above 5,600. Supports on breach of this level are 5,440 and 5,282.

Global markets too put up a muted show last week with many investors away making the most of their spring break. Most benchmarks stabilised and closed with minor changes. CBOE VIX subsided below 12 indicating that investors’ nerves have settled. The European indices, CAC, DAX, Greece General Share Index, Madrid General Index and so on closed sharply lower for the week.

The US market resumed their rally last week with the Dow recording a new life-time high at 14,585. Short-term supports for the index will be available at 14,380 and 14,275. Medium-term targets on strong move above 14,600 are 15,400 and 15,700.

Asian indices such as Jakarta Composite Index, KLSE Composite and Philippines Composite index that were threatening to launch a medium-term down-move last week did a volte-face and are merrily rising again.