Index outlook: Over to the central bankers :: Business Line

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The limelight will be on the two central bankers – Duvvuri Subbarao and Ben Bernanke – next week. The RBI Governor on Monday will let us know if we are getting the ‘big’ policy rate cut that is currently perceived as the manna for all the ills in the economy and the markets.

And the fate of global markets hinges on what the Federal Reserve Chairman says on the ongoing quantitative easing programme. It was the fear that the liquidity unleashed by the global Central banks will dry up, that triggered an exodus from the emerging market bonds last week. This made the rupee fall to 58.98 against the dollar on Tuesday sending a ripple of fear through the equity markets too.

It was only when the Government made some soothing noises and the RBI intervened that the rupee stabilised. The Sensex and the Nifty recovered smartly on Friday to end the week 1.3 per cent lower. The cut was deeper in the mid- and small-cap stocks.

The macro data released last week were mixed, making the market participants indulge in their favourite game of will-the-RBI-cut-interest-rates-no-it-won’t. The industrial production for April growing at a meagre 2.3 per cent, that too on a low base, cast a pall of gloom on investors. But decline in May Wholesale Price Inflation made them cheery. Fitch upgrading India’s outlook to stable from negative was another positive for the market.

Volumes were subdued in both the cash and derivative segment. Index put call ratio has declined to 0.9 implying that market is oversold at this point. Open interest in NSE derivative segment was Rs 1,41,000 crore.

Oscillators in the daily chart have plunged deep in to the over-sold zone. The good news is that there is a tiny upward reversal from there. The 10-week rate of change oscillator kissed the zero line and reversed higher implying that the medium-term trend has not turned negative yet. The 14-week relative strength index is also implying that though the medium-term trend is at risk of cracking, it has not happened yet.

Sensex (19,177.9)

The Sensex retreated to the intra-week low of 18,765 on Thursday before Friday’s rebound helped close the gap formed in the previous session. Those who were worried about the Sensex slipping below its 200 day moving average can now rest easy as it has recorded a weekly close above this line.

The Sensex is reversing after reaching deep in to oversold region. The bounce-back that began on Friday can go on for few more sessions. But the extent of this reversal will determine if the short-term trend has reversed higher or if it is just a dead-cat bounce.

This rally will face resistance at 19,406 and then 19,803 in the week ahead. If the index fails to move beyond the first hurdle, it will imply that it can further slide to 18,765, 18,385 or 18,186 in the upcoming sessions.

A strong close above 19,800 is needed to signal a reversal of the short-term down-trend.

The medium-term trend in the index continues to be up. Key supports over this time frame are at 18,108 and 17,554. Consolidation in the zone of 18,000 and 20,000 for few more months will be construed as positive for the long-term prospects. It is only when the index declines below 17,500 that we need to start worrying.

Nifty (5,808.4)

The Nifty hit the low of 5,683 before reversing higher last week. This rally can take the index higher to 5,891 or 6,021 in the week ahead. Failure to move beyond 5,891 will be the cue to initiate fresh short positions. It will mean that the index can decline to 5,765 or 5,684 again.

Target on decline below 5,683 is 5,595 and 5,477. Short-term trend will turn positive only on close above 6,021.

Medium-term trend in the Nifty stays positive. We currently appear to be in a correction of the up-move from 4,770 low. This move can keep the index in the zone between 5,500 and 6,200 for few more months. Such a move will be positive from a long-term perspective. Long-term view will turn negative only on a firm close below 5,282.

Global Cues

Global markets continued sliding lower last week and most benchmarks ended the week with losses. Nervousness among investors was high with the CBOE volatility index moving up to 18.6 over the week. CNN’s fear and greed index, another gauge of investor mood, is at a reading of 25 that implies extreme fear among market participants.

The Dow slid in the early part of the week, but stabilised thereafter to end the week down 178 points. The index is holding above the short-term trend deciding level at 14,877. This level needs to be broken to imply that the index could be moving towards the next support zone between 14,350 and 14,500. The medium-term view for the index will deteriorate only on close below 14,350.

The Nikkei is in a sharp correction since the last week of May. It is below the critical support of 13,000. But we should watch if the index is able to clamber above it over the next week. If it manages to do so, that will imply that the medium-term trend stays positive for the index. The outlook for this index will deteriorate only on close below 11,230.