Index Outlook: Bears on the prowl
Sensex (15,915.6)Indian investors had to trudge on a treacherous path last week. Just when it seemed to be smoothening and market participants began to breathe easy, a chasm suddenly opened up on Thursday, making the Sensex plunge over 700 points in just two sessions.
Tremors emanating from weaker economies of the European Union and retail investors' indifference towards NTPC's follow-on offer were the reasons that stoked investor panic in the later half of the week. Our market will continue to jig with other equity markets in the week ahead as the movement of dollar and FII flows dictate the trend in financial markets world-wide.
Investors retreated to the sidelines resulting in tepid volumes in the cash segment but activity continued to be brisk in derivatives. FIIs were net sellers throughout last week. Open interest has surged above Rs 1 lakh crore again as traders built fresh positions in the February series.
Daily oscillators continue to move in the bearish zone and weekly oscillators have also declined in to this zone from the neutral area implying that the medium-term trend is at risk of reversing lower. Sharp deterioration in monthly momentum denotes is also a cause for worry.
The Sensex declined to 15,725 before bouncing to 15,950 in Saturday's session. The movement of this index on Monday is critical for determining the near-term trend.
Typically, the third wave down from the 17,790 peak that started last Thursday should be steep and cause havoc with stock prices. Targets for this wave are 15,435 and 14,745. These targets can be achieved in a very short time-span.
But Saturday's session and the feeble fight-back by the US markets on Friday sends a ray of hope that the third wave might not get that devastating and could have ended at 15,725. Short-term resistances for the Sensex are at 16,041 and 16,237. Inability to climb above the second resistance would signal that the downtrend can extend in the near term taking the index down to the 200-day moving average at 15,530 or November trough at 15,330.
The medium-term bearishness will be mitigated on a close above 16,500. As explained last week, minimum targets for a medium term correction if we consider simple Fibonacci retracement of the uptrend from March lows are 14,867 and 14,068.
The week ahead should give us further clues about how this correction will turn out, if it will be a sharp and swift one or a long-drawn shallow sideways move. The Sensex could establish the lower end of its medium-term range once this down-move ends.
Nifty (4757.25)
The Nifty moved in line with our forecast last week and declined sharply after a sideways move.
The short-term view that was veering towards a dramatic collapse in the week ahead has been salvaged somewhat by Saturday's trading session where the Nifty closed 1 per cent higher. The pull-back can continue to take the index to 4,790 and 4,850 in the early part of the week. But downward reversal from these levels will imply that the index will head towards its short-term support at the 200-day moving average at 4,650 or the November 2009 trough at 4,538 in the days ahead.
The medium-term trend is reversing lower and this downtrend will be confirmed by a close below 4,538. Minimum medium-term targets based on Fibonacci retracements are 4,478 and 4,251. Third leg of the current downtrend has the targets at 4,612 and 4,405.
Presence of multiple supports in the region just below can buttress the index in the days ahead and cause sharp rebounds that can trap short sellers. But a close above 4,928 is the first signal required to indicate that the medium-term trend has reversed higher again. Traders should close their short positions on a move above this level.
Global Cues
The gash got deeper in most global benchmarks as they ended the week 4-6 per cent lower. CBOE VIX spiked to 29.2 on Friday before closing at 26.1.That this index has closed above its 200-day moving average is a slight cause for worry as it signals that volatility can persist.
European equities that were at the epicenter of the current turmoil witnessed sharp declines in the second half of last week. DJ Euro STOXX 50 closed 5 per cent lower. This index has already retraced 32 per cent of the up-move recorded in 2009. Next support is at 2,567 that is just 3 per cent away.
US equities emerged stronger than other stock markets in this rout. The Nasdaq closed on a flat note and though the Dow was volatile and declined to an intra-week low of 9,835, it closed the week less than 1 per cent lower. This could be caused by money moving in to US equity from riskier markets.
The recovery recorded by the Dow on Friday could spill-over into the early part of next week. The index can then bounce to 10,150 or 10,200 in the days ahead. Reversal from these levels will however imply that this index can fall to 9,500 over the medium-term.
Greece General Share Index declined below the key intermediate-term support at 2,000. Unless this index clambers above 2,000 again next week, a re-test of March 2009 lows becomes likely. Other benchmarks that went in to a tailspin last week include Spain Madrid General Index and Taiwan Weighted Index.
Pivotals: Reliance Industries (Rs 993.7)
Reliance Industries could not move above Rs 1,056 in the early part of last week and crumpled to the low of Rs 975 by Friday. The stock faces strong resistance atRs 1,030 where the 200-day moving average is positioned. Fresh shorts can be initiated if the stock fails to move beyond this level.
Targets of the third wave from the Rs 1,150-peak is Rs 974 and then Rs 925. Since the first target has already been achieved, continuation of the down-move can take the stock to Rs 925.
The stock continues in a broad medium term range between Rs 1,200 and Rs 850. Investors can expect some respite at Rs 850 if the decline continues.
State Bank of India (Rs 1,913.8)
SBI reversed lower from the intra-week peak of Rs 2,148 to end over Rs 130 lower. The stock declined below the 200-day moving average on Friday and has closed just below this line in Saturday's special session. The stock has already declined to the medium term support at Rs 1,880 that occurs at 38.2 per cent retracement of the prior up-move. Medium term supports on a decline below Rs 1,880 are Rs 1,696 and Rs 1,506.
Resistances for the week are at Rs 1,960 and Rs 2,010. Fresh shorts can be initiated if the stock fails to move above the first target. Close above Rs 2,120 is required to turn the medium term view positive.
Tata Steel (Rs 558.7)
Tata Steel remained resilient in the early part of the week only to decline 5 per cent on Friday. Next target for the down-move from January 21 peak is Rs 498. The 200-day moving average at Rs 470 and the Fibonacci retracement support around the same level will lend strong medium term support to the stock.
The medium term uptrend is at risk of reversing but a close below Rs 540 is needed to confirm this view. Our first medium term target if the decline continues is Rs 450.
Infosys Technologies (Rs 2,389.5)
The stock commenced the week with a volatile session and later sessions it witnessed selling pressure. On Friday, it conclusively penetrated our last week's first support level of Rs 2,400 and also dipped below the second support of Rs 2,350, however, it managed to close above this level. The stock appears to have found near-term support at Rs 2,350. The short-term trend is down since January peak of Rs 2,710. Immediate resistance is at Rs 2,450 and next resistance is at Rs 2,510 for the week. Failure to move beyond Rs 2,450 will be a bearish indication for initiating short positions. Key near-term supports are pegged at Rs 2,350 and then Rs 2,300.
As long as the stock trades above Rs 2,300 level, the medium-term outlook remains positive.
ONGC (Rs 1,094.5)
ONGC experienced an erratic movement during the week, trading between Rs 1,066 and Rs 1,155 intra-week low and high respectively. Though the stock rallied above the 200-day moving average at Rs 1,120, it failed to hold above the average. The stock lost Rs 5 for the week. The near-term trend is sideways for the stock in a narrow band between Rs 1,080 and Rs 1,120. Next support and resistance are at Rs 1,060 and Rs 1,150 respectively. Short-term traders can initiate fresh short position if the stock fails to penetrate Rs 1,120 and exit at Rs 1,060.
The medium-term trend is bearish since October 2009 high of Rs 1,273. This stance will turn positive on a close above the medium-term resistance at Rs 1,160 level.
Maruti Suzuki (Rs 1,369.9)
The stock slipped Rs 20 or 1.5 per cent previous week. Taking support from the 200-day moving average at Rs 1,321 and also just above our support level of Rs 1,311, the stock bounced upward on Friday in line with our expectations.
Significant support for the near-term is at Rs 1,321 and subsequent support level is at Rs 1,291. Short-term trader can buy with tight stop at Rs 1,350, with targets at Rs 1,410.
The medium-term trend is negative for the stock from its all-time high of Rs 1,740, recorded in September 2009. The upcoming week is crucial for the stock, any move above Rs 1,470 will negate this downtrend.
Index Strategy: Long strangle on Nifty
Despite the recent uptrend seen in the special trading session on Saturday and the US market's weak rebound on Friday, bears may continue to wield a higher influence on the markets next week. While it is difficult to say at this point what direction the markets may eventually take, it can be said with some amount of certainty that volatility may be the common denominator. Traders can therefore consider setting a long strangle to play the expected rise in volatility. This can be done by buying Nifty Feb 4,700 put, which closed at Rs 91.5 and Nifty Feb 4,900 call that ended the week at Rs 54.1.
The strategy will involve an initial debit of Rs 145.6 per lot.
But since the technical outlooks points to a pull-back that may take the index to 4,850 levels first from where it is likely to reverse lower, you can even stagger the purchase of the put and call accordingly so as to bring down the cost of the spread.
Since the options involved in setting the long strangle are out-of-the-money, you will need a larger move in the index price (when compared to long straddles) to earn profits. In this case, your spread will become profitable only when the index breaches past 5,045 (4,900 + cost of spread) or trudges below 4,555 (4,700 - cost of spread).
But if index moves decisively past the strike price of the options purchased, consider cutting the loss-making option position first while keeping the profitable one open.
That is to say, consider exiting the 4,900 call if the market reverses lower from 4,850, in which case it is likely to head towards its support at 4,650 (see index outlook). Traders can also consider going short in such case.
Disclosure: I don't have any positions in the above said scrips & NIFTY FUTURES.
Disclaimer:
"I do not make any warranties, express or implied, as to results to be obtained from using the information in this e-letter. Investors should obtain individual financial advice based on their own particular circumstances before making any investment decisions based upon information in this report."
