Index Outlook from

>> Sunday, November 16, 2008

Sensex (9964.2)

In an interview broadcast in 2004, Bob Prechter had said that “Bulls markets climb a wall of worry and bear markets slide down a slope of hope.” Markets slid down this slope last week despite the hope held out by the massive stimulus package announced by China and sharp decline in inflation numbers. Most global indices ended 4 to 5 per cent lower.

It was a volatile week on the Indian bourses too as the Sensex initially made an attempt to rise higher but gave up at 10570 to close the week with a 6 per cent loss. Volumes perked up on days that market declined. The cautious mood among the trading fraternity is reflected in the Nifty put call ratio creeping above 1.

The daily oscillators have reversed lower once again implying that the short-term outlook is under a cloud again. The 14-day relative strength index is reversing lower from 49. The weekly momentum too remains very poor. The indecisive spinning top candlestick pattern formed the previous week has been followed by a long bearish candle which can be part of an evening star formation that portends a short-term reversal.

It is obvious that the market is struggling to hold higher levels. But the positive short-term trend that began from the 7697 has not been decimated yet. A close below 8938 is needed to open the floodgates of selling once more. Recovery above 8938 can result in a sideways move between 8950 and 11000 for a few sessions.

The half-hearted rally witnessed in the first half of last week has, however, turned the medium-term view negative again. A firm close above 10700 is needed to mitigate this outlook. Else a slide towards the June 2006 trough at 8800 or the October 2005 trough at 7657 is possible in the medium-term again. Another recovery from these supports can set the range between 7500 and 11000 for the rest of this year.

In the week ahead, Sensex can slide lower to 9256 or 8938. Buying can emerge in the support band between 8800 and 9000 causing a sharp rebound. Resistances would be at 10300 and 10940. Inability to move past the first resistance will accentuate the negative short-term outlook.

Nifty (2810)

Nifty reversed from an intra-week peak at 3161 forming a double-top in the daily charts. Immediate support for the index lies at 2630. As explained last week, the near-term outlook will turn overtly negative only on a close below this level. A rebound from here can result is a range-bound move between 2650 and 3200 for a few more sessions.

Resistances for the week would be at 3060 and 3250. Traders can initiate fresh shorts on a reversal from the first resistance. Downward targets are at 2630 and then 2595. Support will be available around 2600.

The medium-term view is now being revised to negative. This view will change only on a firm close above 3200. Else, the possibility of a slide towards 2595 or 2300 once again will remain open.

Global Cues

After two weeks of relative stability, volatility returned to equity markets. The CBOE volatility index that had declined to 44 in the days preceding the US Presidential election, spiked to 69, signalling the return of nervousness in the investor community. Most European, Asian and Latin American indices reversed the two-week old up-trend.

The Dow Jones Industrial Average is valiantly fighting to hold the support at 8000. This index has been moving sideways between 8000 and 9800 over the last five weeks. The intermediate term trend continues to be down and a decline to 7600 or 7200 is likely on a breach of the 8000 support. The long-term trend in the index will turn explicitly negative only on a monthly close below 7200. The corresponding level in S&P 500 is 760.

Strength in dollar derailed the nascent commodity rally and the CRB index is once more at its end-October levels. Nymex crude prices emphatically moved below the key long-term support at $62, signalling an imminent decline to the next support at $49.9. — Lokeshwarri S. K.