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Sunday, Jan 30, 2011
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Investment World - Technical Analysis
Markets - Outlook
The vagaries of stock markets were once more on display last week. Stocks put up a gritty show in the run-up to the monetary policy and even managed to climb higher after the policy rate hikes announcement. Just as market participants were rummaging for their shopping list, the 19,000 floor caved in, sending stock prices hurtling down a deep chasm.
Needless to add that the short-term outlook is now in shambles. Market morale too is dented with the close behind the much-watched 200-day moving average. It is the fear of future rate hikes that is the ostensible cause for this fall.
Volumes were robust especially on the derivative expiry day. FIIs net sold almost Rs 2,357 crore in the last two sessions. But it needs to be borne in mind that the actual fund withdrawal from the FII custodian accounts can be much higher and is not completely reflected in the secondary market transaction reported by SEBI. Open interest is very low at about Rs 1 lakh crore as traders await a reversal to re-enter. Higher put call ratio reflects the pessimistic mood among the market fraternity.
Oscillators in the daily chart are nearing oversold levels. Daily relative strength index is at a level recorded in last May when the index recorded the 15,960 low. Weekly oscillators are beginning to move in to the negative zone though there is no great alteration in monthly oscillators. The giant bearish engulfing candlestick in the monthly chart is however a little disconcerting and denotes that weakness can persist for some more time.
The Sensex has closed the week only 3 per cent lower. It is the penetration of the 19,000 level that acted as a strong buttress over the last two months that has marred the near-term outlook. As we have been reiterating, as long as the index held above this level, there was the possibility of a move higher to 22,000 or 24,000 over the ensuing months.
Breach of this level opens the way for the index declining to the next support zone between 17,800 and 18,300. The Sensex spent the period between January and September last year grappling with this band. The 61.8 per cent Fibonacci retracement of the up-move from 15,960 trough at 17,926 also occurs in this band.
It is not yet possible to judge the degree of this correction. But if the index manages to rebound from the above mentioned zone, the medium-term trend will stay positive and a re-test of the life-time high remains possible.
However, decline below this level would mean that the correction is long-term in nature and the minimum targets in that scenario would be 16,758 and 16,100. The movement of the index over the next two weeks should help us judge the medium-term trajectory better.
As indicated over the last two columns, targets for the current down-move are 19,334, 18,512 and then 17,689. Since the second target has also been breached, the index could attempt to move towards the next target that also occurs close to the support band mentioned above.
The index is getting oversold from a short-term angle. A bounce next week can take it higher to 18,657 or 18,918. Downward reversal from either of these levels would mean that the index would head lower 18,175 or 17,800. The index needs to record a strong close above 19,340 to signal that the short-term outlook has turned positive again.
Now that the much-awaited correction is finally unfolding, investors can begin cherry-picking their favourite stocks instead of watching index levels. Very few are fortunate enough to buy on the day the market bottoms.
Nifty (5,512.1) targets for the third wave from 6,338 that we have been indicating over the last two weeks are 5,801, 5,567 and 5,332. The Nifty is already below the second target and could attempt to test the next downward target. Next important support band from a medium-term perspective lies between 4,700 and 5,300. The 61.8 per cent retracement of the up-move from May 2010 trough gives us the target of 5,378. Traders should therefore watch out for a rebound anywhere between 5,200 and 5,300.
A rebound in the index next week can take it higher to 5,589 or 5,670. Downward reversal from either of these levels will be the cue for traders to initiate fresh shorts with the expectation of decline to 5,459, 5,378 or 5,236. Short-term outlook will turn positive only on a strong close above 5,801.
Global equity markets were strong in the early part of the week but they gave up some ground on Friday as the Egyptian problem erupted. CBOE VIX spiked to 20 on Friday indicating heightened nervousness among investors. Key resistance for this index will however be at 23 where the 200-day moving average is positioned.
The Dow moved above the 12,000 level briefly mid-week but it ended the week 48 points lower. Short and medium-term trends in the Dow remain positive. Immediate support is at 11,625. If the index holds above this level, rally to 12,444 or 12,896 remains likely over the medium-term.
European indices such as the CAC, DAX and FTSE that were rising to multi-month highs were pulled back sharply on Friday. Latin American markets in Brazil, Mexico and Chile experienced selling pressure right from the onset of the week and closed between 1.5 to 4 per cent lower. Surprisingly, many Asian benchmarks such as Taiwan Weighted Index, Shanghai Composite, Jakarta Composite Index, Seoul Composite and so on bounced up smartly.
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