Stocks underwent a week of intense volatility with dramatic plunges and equally sharp pull-backs in each trading session. This spells good tidings for both the bulls and the bears.
Buying seems to be emerging at every decline, stemming the fall and causing sharp reversals. On the other hand, the Sensex and the Nifty are struggling to break past the ceiling formed by the 200-day moving average.
But there are numerous positives that the market can use to clamber higher this week. The US market is roaring higher as weak data points have further strengthened the expectation that the Fed will not hike rates too aggressively this calendar.
Declining consumer and wholesale price inflation numbers in India provide headroom for further rate cuts by the RBI.
The rupee has halted its slide around the 64.5 mark and is strengthening again.
This will help curb FPI outflows that are closely related to the currency movement. According to data released by SEBI, foreign investors turned net buyers on Thursday.
The dollar has also begun correcting sharply. Finally, the dollar index is down 7 per cent from the recent peak of 100.27. This will also provide respite to the rupee and take the pressure off the RBI to protect the rupee.
Given these factors, the market can attempt to consolidate at these levels.
The FPI flows will be a key determinant of short-term trend on the bourses. They have pulled out $1.19 billion from the Indian stock market in May.
The outflow from debt is higher at $2.6 billion. For the calendar 2015, however, FPIs have bought stocks worth $6.6 billion and debt worth $5.9 billion.
The fresh set of earnings announcements, Prime Minister Modi’s visit to China and the movement of the rupee will keep investors riveted in the week ahead.
The Sensex has been moving in a narrow band between the 26,423 and 27,500 over the past week.
The week ahead: The index has formed a low around the previous bottom at 26,469 and is attempting to protect it. This remains the important support to watch out for now.
The resistance exists at 27,500, where the 200-day moving average is positioned.
The 38.2 per cent retracement of the previous down-move also occurs at this junction. Inability to move above this level will imply weakness and the possibility of a decline soon. That said, a move above 27,500 does not necessarily clear the path for the Sensex as a more formidable hurdle exists around 27,820 and 28,100.
Reversal from these resistances will imply that the downtrend from the 30,024 peak will have legs that will pull it lower to the next medium-term support level.
Medium term trend: The Sensex has already reached our first medium-term target around 26,300. It is obvious that a three wave down-move is complete from the peak at 30,024.
But failure to move beyond 28,100 level in the Sensex will imply that it is moving towards the next medium-term target zone of 25,700 or 25,200.
A strong close above 28,700 is needed to mitigate the bearish outlook.
The Nifty is stuck in the 8,000-8,300 range over the past two weeks.
The week ahead: A three-wave down move appears to have ended at the low of 7,997 in the Nifty. The index has support around 7,961, the trough formed on December 17. It has halted close to this level and is attempting to stabilise.
Immediate hurdle for the index is at 8,323. Presence of the 200-day moving average in the vicinity lends weight to this hurdle. If the index keeps moving in the current range, it will imply weakness and the possibility of a decline to 7,800 or 7,452.
Move beyond 8,350 will take the index to the next hurdles at 8,434 and 8,682. The outlook for the index will turn positive only on a strong close above 8,682.
Medium-term trend: As explained earlier, the Nifty has the first medium target at 7,994 and then at 7,670.
The index is currently attempting to consolidate around the first target. But if the current sideways move continues or if the index fails to move beyond 8,435, decline to 7,670 becomes possible.
The extent of the current bounce-back will determine how far the index can go in the days ahead.
Most global indices recovered last week to close with minor gains. With the fears of the Fed going on an interest rate hiking spree receding, the CBOE volatility index declined to close the week at 12.3, close to the lower end of its recent support band.
European benchmarks, however, turned weak as the Greece crisis reared its head again. DJ Euro STOXX 50 closed about 2 per cent lower.
US markets were gung-ho with the benchmarks closing at record highs. The Dow Jones Industrial Average ended above the 18,000 mark at 18,272.
As we have been writing, the index has been moving in a range of 17,500 and 18,500 since this February. Break beyond 18,300 can take the index to 18,830 in the coming sessions.
It was a tepid show by most Asian markets. Some benchmarks such as the Taiwan Weighted, Karachi 100 and Hang Seng recorded steep declines.