Index outlook: Markets pull back from the brink: Business Line

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There was bedlam in global financial markets last Monday as currencies, equities and commodities spiralled out of control. The Sensex and the Nifty opened with a large downward gap on Monday morning as news of a collapse of the Chinese market and rout in other Asian markets trickled in. The cut got deeper over the session, with the benchmarks closing almost 6 per cent lower.

The extent of fear in the global stock market is captured by the CBOE VIX, also called the investor’s fear gauge. This index spiked to 53.3 on August 24; a level last recorded in January 2009. CNN Money’s Fear and Greed index is also indicating extreme fear, at 14.

But global markets have fought back over the week, with many of the benchmark indices wiping out almost all the losses recorded earlier in the week. It was the Chinese central bank’s move to cut the interest rate and ease reserve requirements that helped pull markets back from the brink.

The Shanghai Composite Index was the worst affected in last week’s rout, losing almost 8 per cent. The index lost about 38 per cent from its June peak and closed just above the long-term support at 3,200, that occurs at the 61.8 per cent Fibonacci retracement level of the previous rise. The recovery in this index towards the weekend is not strong enough to signal that a bottom is in place. It is the same with other benchmarks too. We need to watch the movement of this index next week before drawing a conclusion on the sustainability of this rebound.

Stability in the rupee is one of the key factors that will determine market moves, going ahead. The currency has also pulled back from the low of 66.77 recorded last Tuesday to close at 66.16. Immediate resistance is at 65.6. If this level is not crossed, the rupee could oscillate between 66 and 67 for a few more weeks.

The worrying factor is that foreign portfolio investors have turned net sellers in the equity markets, selling even in sessions when the market recovered. They have pulled out around $2.6 billion from the equity and debt market so far in August.

How they oscillate

The decline in the initial part of the week took the daily indicators deep into the negative zone. There is a slight recovery from these lower levels in the relative strength index and rate of change oscillators. But this reversal is not strong enough to suggest a change in the short-term trend. The weekly indicators that were attempting to move higher have moved back in to the negative zone once again. This puts the medium-term trend in jeopardy again.

The most worrying aspect is the sell signal in monthly oscillators. We need to track them over the next few weeks. If they move deeper into the negative zone, the long-term trend could also come under threat.

Nifty (8,001.9)

The Nifty dipped to the low of 7,667 before ending the week around 298 points lower.

The week ahead: There is now no doubt that the third leg of the medium-term downtrend that began from the 9,119 peak is currently in motion. This wave has the targets of 7,925, 7,475 and 7,024. The Nifty has made a low between the first and second targets. It now needs to be seen if the gap that was formed between 8,225 and 8,060 on Monday is closed. The Nifty is currently poised at the opening of this gap. There is also a Fibonacci retracement resistance at 8,046 that will impede the Nifty in the near term.

Inability to move above the resistance zone between 8,050 and 8,100 will mean that the index is heading lower to 7,667 or 7,475.

But if the index manages to move higher next week, it will face resistance at 8,200 and then at 8,285. A strong close above 8,300 is needed to signal a reversal in the short-term down trend.

Medium term trend: The medium-term trend in the Nifty has now changed to sideways. The index has medium-term supports at 7,600 and then at 7,400. If the index manages to hold above these supports, the index will move in a broad range between 7,400 and 9,000 for a year or more before moving to a new high. That is the best case scenario. If there is a decline below 7,400, fall to 6,844 or 6,300 is possible. Since the peaks in 2008 and 2010 were formed around 6,300, this support is likely to hold.

Sensex (26,392.3)

The Sensex fell to the intra-week low of 25,298 before closing 973 points lower.

The week ahead: The gap formed between 27,131 and 26,730 will be a key resistance zone for the Sensex in the coming days. The index is currently poised slightly below the base of this gap. Inability to move beyond this hurdle can drag the Sensex down to 25,298 again over the week. If it manages to move higher, resistances will be at 27,000 and 27,324.

Global cues

Global markets recovered from an extremely turbulent start to close on an even keel. The medium-term trend in most major benchmarks is however down.

The Dow declined below the medium-tem support at 15,855, indicated in our last column, to hit an intra-week low at 15,370. The index has however recovered smartly to close well above this level. That said, the index faces short-term resistance at current levels. In other words, it needs to move higher from here to signal that it is out of the woods.