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Index Outlook — Air pockets ahead
Sensex (14625.2) Sensex treaded water in the early part of last week as the expiry of the May derivative contracts dominated proceedings. Fresh resolve displayed by the new (?) Cabinet to make a difference this time around, provided the impetus to help Sensex close the week with over 700 points gain.
The bizarre rallies in some small cap stocks were the dark clouds in an otherwise bright blue sky.
Volumes were extremely robust both in cash as well as derivatives segment. Advance decline ratio soared to levels not witnessed since the last quarter of 2007. FIIs started ploughing in funds in to Indian markets again last week after a brief hiatus.
We begin the June series with relatively comfortable open interest around Rs 65,000 crore though the short positions that can cushion falls have also reduced substantially.
Oscillators in the daily chart are at 18-month highs but there is no negative divergence in these indicators yet implying that the near-term outlook stays positive despite the sharp up-move recorded over the last two weeks.
What is worrying is the 10-week rate of change oscillator at 62, a 10-year high, since spikes such as these are unsustainable. Monthly oscillators are just approaching the bullish zone. One more spurt is required to make the long-term outlook positive for Indian equities.
Sensex recovered from an intra-week low of 13518.
The gap formed on the Monday following Lok Sabha election result, between 12219 and 13479 remains unchallenged and the ceiling of this gap at 13480 will be a key short-term support.
The index could follow either of these trajectories over the near term,
a) It can reverse lower from the resistance between 14900 and 15200 and head lower towards 14000 again. Such a move will be construed a halt before the index readies to make another assault to move clear of the 15000 mark.
b) A strong break-out above 15200 would mean that Sensex is heading towards the target band between 15900 and 16200.
A close below 13450 would be needed to signal a short-term trend reversal.
The medium-term trend too continues to be up and a close below 12200 is needed to weaken this trend.
However, caution should not be discarded since the index is approaching key intermediate term resistance levels that are 15284 (55 per cent retracement of the down-move from 21206) and 16180 (61.8 per cent retracement of the down-move).
According to e-wave counts too, Sensex appears to be nearing the end of the up-move from March trough.
Sensex could move higher to 14930, 15034 or 15284 in the week ahead. The index can waver as it nears the 15000 mark and some bumpiness can be expected around that level. If the upsurge continues beyond the third target, the next halt can be at 15970. Short-term supports are at 14000 and 13518.
Nifty (4448.9) Nifty reversed from an intra-week low of 4092 to close with 210 points gain.
The index can move on to 4509 or 4534 in the short-term. If Nifty reverses from the resistance zone between 4500 and 4550, it will then decline to 4250 or 4092 in the near term.
However, a surge above 4550 will take the index to 4646. Short-term traders can buy in declines with a stop at 4090. Nifty is also near key intermediate term resistances that are 4456, 4646 and 4904.
The up-trend from March lows can end at either of these levels. Close below 3750 is however needed to signal a medium term trend reversal.
Global Cues Global equities displayed a steady trend last week. CBOE volatility index spiked to 35 on Tuesday tracking weak equity markets. But it declined later to end the week below 30 reflecting the complacent mood among investors.
Dow remained in the range between 8200 and 8500 last week. A rally to the next resistance zone between 8900 and 9100 appears likely unless there is an emphatic close below 7700. Latam markets such as Peru and Chile were the out-performers. Commodities have been surging higher led by crude and gold. CRB index that tracks the movement of a basket of commodities rallied 2.5 per cent higher last week. This index has retraced almost one-third of the losses made since the July 2008 peak.
Pivotals
Reliance (Rs 2,277.5)
RIL moved sideways in a narrow range before spurting to an intra week peak of Rs 2,304 on Friday. As indicated in our last column, the short-term trend in this stock is down.
Immediate short-term resistance is at Rs 2,346. If the stock fails to move above this level next week, the down-trend from Rs 2,490 will accelerate to pull RIL lower to Rs 2,100 or Rs 1,908. Target above Rs 2,346 is Rs 2,490.
Intermediate-term resistance for the stock continues to be at Rs 2,384 since this is a 61.8 per cent retracement of the down-move from January 2008 peak. Failure to surpass this level will drag RIL lower to Rs 1,900 or Rs 1,500 over the medium term.
Investors should exercise caution until the stock records a strong weekly close above Rs 1,384.
SBI (Rs 1869.10)
SBI continued rising at a searing pace and closed 8 per cent higher. This move has taken the stock above the key intermediate term resistance at Rs 1,827.
As indicated in our last column, next target of the up-move from the March trough is Rs 1,970.
But if the stock continues to trade above Rs 1,827, it can even move beyond Rs 2,000 to its former all-time high. Stop-loss for medium term can be at Rs 1,500.
The short-term trend in the stock is also up.
Oscillators in the daily chart continue to point upwards though they are featuring in the overbought region.
Immediate targets for the stock are Rs 1,970 and Rs 2,020. Short-term supports are at Rs 1,755 and Rs 1,667. Short-term traders can buy in declines as long as the stock holds above the first support.
Tata Steel (Rs 406.3)
Tata Steel moved sideways with a positive bias last week and finally ended with 12 per cent gain.
It is apparent that the stock is now retracing the entire down-move from the January 2008 peak. Next medium-term target according to this assumption is Rs 457 and Rs 487.
That the stock is holding above the long-term 200-day moving average currently positioned at Rs 326 is a positive and we retain a positive medium-term view as long as Tata Steel holds above this level.
The short-term trend in Tata Steel continues to be gung-ho. The stock could attempt to move on to Rs 422 or Rs 457 in the near term. Short-term supports are at Rs 354 and Rs 316.
Infosys (Rs 1,602)
Infosys moved in line with our expectation; the pull-back rally in the beginning of the week halted at our second target.
But instead of reversing lower, the stock is meandering sideways around Rs 1,600. This pull-back can extend to Rs 1,660 or Rs 1,702.
Short-term investors should however continue to tread carefully as long as the stock trades below the second target as a reversal under this level can pull the stock lower to Rs 1,486 or Rs 1,450. The long-term 200-day moving average at Rs 1380 will also provide support to the stock.
We retain a negative medium-term view for this stock since it has turned lower from key resistance at Rs 1,750 - that is 50 per cent retracement of the down-move from the February 2007 peak.
Medium-term supports for the stock are at Rs 1,490 and Rs 1,410.
Maruti Suzuki (Rs 1,021.5)
Maruti reversed higher from our first short-term support at Rs 940 and closed near the intra-week high.
As indicated earlier, the stock can attempt to consolidate above the key medium-term resistance at Rs 950 and the view will turn negative only on a weekly close below this level.
Next medium-term target for the stock is Rs 1,100.
The short-term trend in the stock is sideways and it is moving in the range between Rs 950 and Rs 1,050 in this period.
Break-out beyond either boundary is needed to decide the medium term direction in the stock. Short-term investors can buy in declines with a stop at Rs 940.
ONGC (Rs 1,175.9)
ONGC continued its vertical climb and ended the week 12 per cent higher.
The stock effortlessly sliced through the key intermediate term resistance at Rs 1,100.
As mentioned last week, if the stock holds above this resistance, it can go on to its all-time high once again.
Monthly oscillators moving in to the bullish zone also support the view that the long-term outlook has turned positive for the stock.
We will retain a positive medium term view unless the stock goes on to record a weekly close below Rs 1,090.
Short-term supports are at Rs 1,135 and Rs 1,086.
Short-term traders can buy in declines as long as the stock holds above the first support.
Short-term resistances are Rs 1,218, Rs 1,266 and Rs 1,302.
Nifty future may move higher, but caution advised
Defying gravity, the market continued to witness a firm trend. The Nifty June future closed the week at 4441 with a gain of 4.8 per cent over the previous week's close of 4256.2. However, the June future closed at a discount of about eight points with respect to the spot close of 4448.9. Besides, June series saw a market wide rollover of 69 per cent, which is significantly lower than the average 75 per cent rollover witnessed over the past few months.
Only 58-59 per cent of the Nifty positions got rolled into the June series, which is also significantly less than the average 65 per cent seen in the previous expiries.
Follow-up
We had advised traders to go short on Nifty future keeping the stop loss at 4425 with a target of 4050. Though the Nifty began to ease bit, it did not touch our price target. On the other hand, Friday's sharp rally lifted the benchmark above our stop loss level.
We had also advised traders to buy 4000 put, whose value almost halved.
Outlook
Despite Nifty future being in overbought position, it still appears to have some steam left. Having crossed the 4425 resistance on a closing basis on Friday, it is now heading for its next resistance level of 4630. However, we do not expect a smooth sailing on the way to 4630. A drop below 4210 would negate the positive sentiment in this contract. If it manages to dip below that level, then the next support level appears at 3650, which is a very critical support. The Nifty might move in a tight range of 4650-4250, and a break in either side would swing the Nifty future sharply in that direction. Emergence of option writers as well as discount in many stock futures, (including index future) point that bears may make one more bid to pull stock prices lower.
Option monitor
Option writers (sellers) for both calls and puts were on the rise indicating that market might move in a range. Selling activity was quite perceptible in the case of calls. Among the calls, 4500, 4600 and 4700 witnessed heavy activity. Sharp accumulation in 4500 suggests that Nifty could face a strong hurdle at 4500. Of the puts, 4200 and 4300 witnessed most activity while 4000 saw sharp accumulation. This indicates that Nifty could face strong support around 4000.
Volatility Index
Volatility index witnessed large intra-day swings week. On couple of days, it crossed the 80-point mark during the trading session but closed sharply lower at 40.3 on Friday against the previous week's close of 83.7. This also suggests that call writers have emerged, as the activity was mainly centred around calls.
Recommendations
Traders can consider the following strategies.
Consider going long on Nifty future keeping the stop loss at 4210. Traders could book profit at 4550 and 4650. The stop has been given way below the current price intentionally. Only traders with a high risk appetite can consider this strategy.
Traders could also consider short straddle using 4400 strike. While 4400 call ended at 210.55, the put closed on Friday at 156.55. This strategy is best suited if one considers that the market is likely to move in a range. This strategy would end up in negative if the market starts trending in one direction.
FII trend
The cumulative FII positions as percentage of the total gross market position on the derivative segment as on May 28 declined to 41.75 per cent. They were net sellers predominantly in recent times, particularly on stock and index futures. They now hold index futures worth Rs 11,451.4 crore (Rs 13,160 crore) and stock futures worth Rs Rs 18,577.7 croe (Rs 21,994.3 crore). On index options, FII holding decreased sharply to Rs 21,002.39 crore (Rs 38,040.58 crore).
Relative Strength Index
One of the most useful and popular momentum oscillators is the Relative Strength Index (RSI). It was developed by J. Welles Wilder and published in his book New Concepts in Technical Trading Systems in 1978. The RSI oscillator determines the strength in the prevailing trend by comparing the magnitude of a stock's recent gains to the magnitude of the recent losses. The RSI is plotted on a range of 0 to 100.
The Relative Strength Index is calculated using a formula, as follows:
RSI = 100-(100/1+RS)
where RS = Average of up days' closes/Average of down days' closes
The number of days typically used for calculating the RSI is 14 days. While calculating for the weekly timeframe 14 weeks' data is used. To find the average of up days' closes, add the total points gained on up days during the 14 days and divide that total by 14.
For calculating average of down days' closes, add the total number of points lost on down days during the 14 days and divide that value by 14. The Relative Strength (RS) is calculated by dividing the up average close by the down average close.
For example, to compute a 14-day RSI, we will have 14 price changes. The first average gain is calculated for the 14 days.
Let's assume that the sum of all gains during the past 14 days be Rs 400; this value is divided by 14. Similarly, let's assume that the sum of all losses during the past 14 days is Rs 130. This value is divided by 14 to arrive at the first average loss as follows:
First average gain = 400/14 = 28.6
First average loss = 140/14=10
RS = 28.6/10=2.86
RSI = 100-[100/(1+2.86) = 100-[100/3.86] = 100-26 = 74
The RSI value for the first 14 days is at 74.
Next step is computing the subsequent RSI data. To calculate this, we have to calculate the "averages of gains or losses" by taking the previous average gain or loss and multiplying it by x – 1, where x is the number of days for which RSI is computed.
The gain or loss for the next session is added to this value and the result is divided by x. Continuing with our example, if the stock gains Rs 80 in the next session, the RSI is calculated as follows:
Average gain = (28.6*13 + 80)/14
= (371.8+80)/ 14 = 451.8 /14 = 32.3
Average loss = (10*13+0)/14
= 130/14 = 9.3
RS = 32.3/9.3 = 3.47
RSI = 100-[100/(1+3.47)]
= 100-[100/4.47] = 100-22.4 = 77.6
The 14-day RSI value increases to 77.6 in the next trading session.
With the same example, if the stock declines on the subsequent day by Rs 160, the RSI is calculated as
Average gain = (32.3*13+0)/14 = 420/14 =30
Average loss = (9.3*13+160)/14
= (121+160)/14 = 281/14 = 20
RS = 30/20 = 1.5
RSI = 100-[100/(1+1.5)] = 100- [100/2.5] = 100-40 = 60
The RSI value declines to 60 in the next session. In this fashion, the RSI increases or decreases depending on the magnitude of the stock's recent gains or losses.
