Sunday, 12 August, 2007

Index Outlook

Sensex (14868.2)

Markets were fixated on the sub-prime contagion last week, rising euphorically on the slightest indication that it had abated and tanking miserably when the issue reasserted itself. The mild 2 per cent loss in the Sensex does not reflect the wild intra day swings that buffeted the investors last week.

The liquidity prop that helped the Sensex cross 15000 is turning shaky now. FIIs have been net sellers in August so far. The mood in the market has not turned negative enough to indicate a bottom. The build-up in the derivatives section continuing above Rs 80,000 crore and dip in Nifty put-call ratio indicates that players are betting on the correction ending soon.

If we consider the rally from the March trough of 12316, the index has completed the minimum retracement of 38.2 per cent. If the Sensex manages to hold above 14500, the positive outlook for the intermediate term will continue. But a fall below will mean that the index will head for the band between 13900 and 14200.

Though the correction is providing lucrative buying opportunities, any buying should be staggered and done with the long-term perspective only. We are beginning to get early indications that we could have begun the correction of the 7000 points rise recorded since last June. The minimum target as per this count is 13748. Though a move below 14500 is the first requisite for confirming this assumption, some restraint in chasing stocks is called for at this point.

The reversal on Thursday and the gap-down opening of Friday have made the short-term outlook very negative for the index. Volatility would rule supreme next week too. The Sensex could try to edge up to 14942 and then 15170. Failure to move beyond 15000 would be a sign that the index is heading for another sharp dip to 14570 and then 14379. Support below will be available at 14154. A move beyond 15540 is required to make the short-term outlook positive.

Nifty (4333.3)

Nifty reversed from our second resistance at 4525 last week to end the week slightly below the 50 DMA. Thursday’s reversal could be the beginning of the third leg of the fall that began at 4643. This wave has the targets of 4297 and then 4154. Since the index is hovering above the first target, a step lower will take it to the next target.

The initial target if Nifty is correcting the move from the 2595 low is 4028. Investors should watch out for the support band between 4000 and 4050.

Resistance for the week ahead would be at 4350 and then 4419. Reversal from the first target would be very negative whereas a move above the second resistance would take the Nifty to 4530.
Global Cues

The rally in the early part of last week in the Dow Jones Industrial Average was halted at 13700, as indicated last week. A move lower to 12800 seems imminent. But the up-trend from the June 2006 will be jeopardised only on a fall below 12800.

Nymex crude too moved lower last week. The breach of the support at $71.9 is a trifle worrisome. The subsequent supports are at $69.7 and then at $67. A move below $67 will mean that the intermediate term up trend from the January low of $49.9 is complete.