Irrationality was to the fore once again last week, this time sending stocks spinning down a deep chasm. Any stock with a real-estate and banking tag or remotely connected with the so called ‘loans for bribes' scam was battered out of shape. The loss to the large-cap stocks was, however, not so severe and the Sensex closed 450 points or less than 3 per cent lower.
It was the BSE Small-cap Index that was badly bruised, losing 7 per cent. This sell-off in smaller stocks has severely affected investor morale. FIIs too turned nervous following North Korea's aggression against its southern neighbour and the continuing debt crisis in Europe. Barring Monday, they were net sellers through the week. Derivative volumes reached a crescendo towards mid-week as expiry coincided with the market crash.
Though the Irish debt problem could reach a solution this weekend, sabre rattling by South Korea and the involvement of US and China in the Korean skirmish could keep markets edgy next. With the corporate cupboards overflowing with skeletons of all kind, there will be plenty for the self-styled bloodhounds to unearth to keep the panic going in the ongoing loan racket. That means that it will be an up-hill struggle for the Sensex in the days ahead.
Oscillators in the daily chart have moved deep in to the oversold zone, while the weekly oscillators are still hovering in the neutral zone indicating that the medium-term trend has not reversed lower yet. Similar movement is observed in monthly oscillators. Formation of a doji star in the monthly candle-stick chart of the Sensex is a cause for concern. But we need to see the next month's movement before confirming the implications of this pattern that is a long-term reversal.
The Sensex recorded the intra-week low of 18,955 before ending at 19,136. We continue with the view that the medium-term view remains positive as long as the index holds above 19,000. The Sensex can yet reverse higher from these levels and move above 20,000 again. This coincides with our expectation of the index spending few more months in a sideways band between 19,000 and 21,500 before attempting a new high.
But it is human to feel apprehensive near the lower boundary of a trading range and overtly bullish near the upper. What if the 19,000 level is breached strongly? As we have been explaining over the past weeks, decline below 19,000-floor will put the medium as well as the long-term trend in jeopardy.
We had been working with the assumption that the up-move from May trough is currently being retraced. This retracement can pull the index all the way down to 17,926 or 18,000 (to quote a psychological figure). But once the flood-gates of selling are opened, it is hard to say where it can be dammed. Decline below 19,000 will also bring forth the possibility that the entire up-move from March 2009 low of 8,047 is being corrected. Minimum retracement targets as per this assumption are 17,189 and 16,118.
The ideal scenario is one of a mid-week blip to 18,534 or 18,348 before the index clambers back above the 19,000 mark. The movement over the next couple of weeks needs to be seen before drawing conclusion on the degree of the correction and the shape it is likely to take.
A weak start to the week will find the Sensex declining to 18,534, 18,348 or 17,926 in the days ahead. Resistance will be at 19,502, 19,776 and 20, 284. The short-term situation will be salvaged only if the index climbs above 20,200 where the 21- and 50-day moving averages are positioned.
Nifty (5,751.9)Nifty moved briefly below our key medium-term support at 5,745 to record the low of 5,690 before ending above this support. The index has key support at 5,745 since this occurs at 38.2 per cent retracement of the move from the 4,786-trough. If the index manages to hold above this level, a movement between 5,745 and 6,400 remains possible for few more months.
But as explained last week, decline below this level can cause a sharp decline to 5,562 or 5,378 before the index bounces higher.
We have to wait for the movement over the next two weeks to determine the degree of this correction. If the correction is of a larger degree, it might not get stemmed at 5,300, but pull the Nifty all the way to 5,200 or 4,886.
A weak beginning to the week can pull the Nifty lower to 5,645 or 5,378. A bounce appears quite likely above 5,378 and traders can watch for buying opportunity around this level. Short-term resistances will be at 5,798 and 5,865 and traders can continue with their short positions as long as the Nifty trades below the second resistance. The medium-term view will turn positive on a close above 6,070.
Global CuesGlobal markets turned nervous with the ongoing tension in Korea. With China's impending policy rate tightening and continuing problems in Ireland, there was no way equity prices could head higher. Most global market, however, put up a resilient show and closed with only marginal losses. CBOE Volatility Index spiked up to 22 on Friday as Standard and Poor slashed debt rating of Irish banks.
It, however, needs to be borne in mind that this index is in a range between 18 and 22 since October and a move above 22 is required to signal that the mood has become too bearish. DJ Euro STOXX fell 3.8 per cent last week implying the onset of the third leg of the correction that is on since April. This correction can pull this index another 5 to 7 per cent lower.
US stocks were extremely volatile last week and the Dow closed 111 points lower after swinging wildly in both directions. We stay with the view that the short-term view will be roiled only on a close below 11,000. But the struggle to move beyond 11,250 signifies that the index can head lower to 10,700 or 10,550 in the days ahead. Despite being in the eye of the storm, the Shanghai Composite closed the week almost unchanged.
The sideways movement in this index however, appears to be a pause before the downtrend from the November 11-peak resumes.
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