Market puts up a resilient show

The indices have once again bounced higher from key supports, indicating strength

India equity markets celebrated Diwali in style, with the Nifty regaining the 8,000 mark and the Sensex moving above 26,800. Equity investors, across the globe, shook off their fears and resumed buying last week; perhaps enticed by the sharp corrections in some stocks.

There was plenty of positive news flow last week. The Modi Government announced a series of policy reforms including diesel deregulation, gas price hike and e-auction of the cancelled coal blocks. The victory of the BJP in the Assembly elections too buoyed sentiments.

Global markets were upbeat as well, with the US and European markets reversing smartly. However, the reason for the reversal isn’t too convincing. It was apparently comments by St. Louis Federal Reserve Bank President, James Bullard — that policy-makers should consider delaying the end of quantitative easing — which caused the turnaround in stock prices.

With the expiry of the October derivative contracts scheduled on Thursday, short-covering by traders could lend further support to the indices.

Volumes on NSE’s derivative segment has spiked towards the weekend and open interest in NSE’s derivative segment has moved above ₹220,000 crore, indicating heightened trading activity. Investors will keep watch on the earnings announcements of companies as well as the movement in crude prices.

The midweek FOMC meeting will be the key to determine the trend in global equity markets. With the bond repurchase programme coming to an end this month, market will keenly await Fed’s next move, especially the impending rise in interest rate.

Foreign portfolio investors reversed their negative stance towards Indian equities last week. After being net sellers since the beginning of the month, these investors turned net buyers.

Momentum indicators in the daily chart of the Sensex are rising to the neutral zone from bearish territory.

This implies that the rally needs to move a little further to signal a reversal in the short-term trend.

That both the Sensex and the Nifty have moved firmly above their 50-day moving average is however a positive sign.

Sensex (26,851)

The Sensex opened with an upward gap last Monday and went on to build on these gains over the week.

The week ahead: The short-term trend in the Sensex has reversed higher. But the index has not made a clean break above the key resistance at 26,820. If the index manages to close above this level on Monday, it will mean that the index can head towards 27,255 or 27,354 in the days ahead.

But the inability to hold above 26,800 on Monday will mean that the index can decline to 26,576 (50-day moving average) or 26,319. Next short-term support is 25,911.

Medium-term trend: The Sensex managed to hold above the 26,000 level last week. The medium-term view is therefore not under any threat. It needs to be seen if the Sensex manages to break above the 27,350 level this time. The inability to do so can keep the index in a range between 26,000 and 27,350 for few more weeks.

We retain the key medium-term supports at 25,000 and 24,500.

Nifty (8,014.5)

The Nifty managed to move above its 50-day moving average and close above the 8,000 mark last week.

The week ahead: The Nifty recovered early last week and has moved to our second target at 8,016. This is a key short-term resistance. The guide-posts for next week’s trade are:

If the Nifty manages to close above 8,000 on Monday, it will mean that the index will attempt to move to 8,160 or 8,180.

Target above 8,180 is 8,360.

The inability to close above 8,000 on Monday will drag the index to 7,915 or 7,848. Traders should desist from initiating long positions on a move below 7,848.

Target below 7,848 is 7,729.

Medium term trend: The medium-term trend for the Nifty stays positive. But the index is nearing a key medium-term resistance. The inability to move beyond 8,150 will make the index move between 7,300 and 8,200 for few months. Medium-term view will be threatened only on a close below 7,300.

Global cues

Global indices advanced from lower levels, beginning a short-term reversal. But this revival needs to sustain another week before we can take it seriously.

Most global indices recorded sharp declines in the middle of the week. But subsequent recovery was sharp.

This leads to the hope that at least one leg of the correction could have been completed last week. Investor sentiment revived sharply and the CBOE VIX declined from the intra-week high of 22.1 to 15.5, reflecting this improvement.

The Dow recovered from the intra-week low of 16,260 to close 450 points higher. But the index is currently poised at its key short-term resistance at 16,812. The index needs to move beyond this level to pave the way for a rise to 17,350.

On the other hand, the inability to move beyond this level will drag the index lower to 15,855 or 15,340.

The dollar index is trying to hold in the band between 85 and 87. Key support that needs to be watched now is at 84. The index needs to decline below this level to signal the end of the rally that began in May.