Weekly Index Snapshot: Sensex poised at key support zone 
Global benchmarks plummeted as Greece's fiscal crisis showed no signs of abating and instead threatened to snowball across the other European regions. This debt concern also stimulated an electronic glitch-driven rout in US stocks on Thursday easing the US market of a whopping $1 trillion as Dow plunged 996 points or 9.2 per cent intra-day.
Asian stocks, Nikkei and the Shanghai Composite also fell in line with the European and US indices. Indian benchmarks Sensex and Nifty followed global peers by slumping 4.5 per cent and 4.9 per cent respectively last week.
Sensex (16,769.1)Since the April 7 peak of 18,048, the Sensex has been on a gradual short-term decline. Taking support at 17,400 levels, the index bounced upward twice in April. However, the up move failed to cross the17,800-level resulting in the formation of a descending triangle pattern. As the pattern is formed at the end of an uptrend in this instance, it is considered to be a reversal pattern. However, the implication of a strong reversal would be minimal as the pattern size is small compared with the uptrend started from March 2009.
On May 4, the benchmark fell 1.4 per cent with good volumes decisively penetrating the triangle pattern and its 50-day moving average. It is trading well below its 21- and 50-day moving averages.
In the same week, the Sensex achieved its descending triangle pattern price objective of 16,800 and is heading towards the significant medium-term support zone between 16,500 and 16,580. Moreover, 200-day simple moving average is positioned at 16,647, which will be the immediate support level to observe.
The daily relative strength index (RSI) has entered a bearish zone, below 40-level and the weekly indicator too has started falling in the neutral region implying that the uptrend is losing momentum whereas the downtrend is gaining strength. Daily moving average convergence and divergence indicator is on the brink of entering into negative territory from positive territory.
A strong decline below 16,500 levels would signal that the Sensex is in a medium-term downtrend which can take the index to 16,000 or back to February 2010 low of 15,650 levels.
Resistances for the near-term are at 17,000 a key psychological level and 17,400. A reversal from the near-term supports can take the Sensex higher to the immediate resistance level of 17,000 or a near-term sideways movement in the band of 16,500 and 17,100, before rallying higher.
Nifty (5018.05)The Nifty moved lower right from the beginning of last week and closed negative in all five trading sessions. A similar descending triangle pattern is noticed in the Nifty with horizontal line at 5,200. It determinedly breached this pattern on May 4 and achieved its price objective of 5,000. Moreover, Nifty slipped below key short-term support band of 5,100 and 5,120, strengthening its short-term downtrend that has been in place from early April peak of 5,400.
The important near-term support for the Nifty is in the band between 4,930 and 4,960 where the 200-day moving average coincides with the support. Rebound from this zone can take the Nifty up to 5,125 or 5,200. Subsequent resistance is at 5,350. However, a fall below 4,930 would drag the index further down to 4,850 or 4,720 in the upcoming weeks. Only a strong close above 5,200 levels would mitigate the short-term downtrend. Swing traders can hold their short positions as long as the index trades below 5,125. The medium-term trend for the index has been sideways since October 2009 between 4,500 and 5,400.
S&P CNX 500 (4,182.2)After hitting long-term resistance in the range of 4,500 and 4,525 in mid January, the index started to move sideways in the broad range between 4,050 and 4,500. The short-term trend is down from the April 7 peak. On Friday, it decisively closed below the immediate support around 4,250 by declining 1.75 per cent. The index is hovering just above the medium-term support of 4,140. Strong close below this level would pull the index down to the lower boundary of 4,050 in the short-term. The resistances for the week are at 4,250 and 4,310.
US Dow and S&P 500 were very volatile last week, swinging as much as 10 per cent in some sessions. The CBOE volatility index was extremely volatile during the last two days of the week, recording a high of 42.15 and ending at 40.9.
This index jumped 86 per cent over the week, signalling that investor panic was exceptionally high. With this, the daily relative strength index has reached the overbought territory implying it can correct in the near-term.
The US Dollar index ended the week at 84.65, gaining 3.3 per cent. Among the European markets CAC was the worst performer last week tumbling 11 per cent, while DAX and FTSE were down 6.8 and 7.7 per cent respectively. Japan's Nikkei also dived 6 per cent. Sri Lanka's All Share Index on the contrary, continued to outperform by advancing 0.8 per cent.
In commodities, gold climbed 2.5 per cent to settle at $1207.8 an ounce and light crude oil plunged almost 13 per cent, ending at $75.1 a barrel.
Pivotals: Reliance Industries (Rs 1,033.8)
It was a volatile week for RIL as it declined to an intra-week low of Rs 991 before moving higher to an intra-week peak of Rs 1,060. This peak followed the Supreme Court's verdict in RIL-RNRL gas supply case which favoured RIL.
The stock ended the week on a flat note forming a spinning top candlestick pattern in the weekly chart implying indecisiveness. Hence, short-term traders should tread cautiously in the upcoming sessions. The stock continues to be in a short-term downtrend since the early April peak of Rs 1,171. A strong move above Rs 1,065 will change the short-term trend positive. In that case the stock can move higher to Rs 1,100 and then to Rs 1,130 levels.
A definite close below the immediate support level at Rs 1,020 will be the resumption of a short-term downtrend that can pull the stock lower to Rs 995 or further down to Rs 966. Our medium-term view in the stock remains sideways consolidation in the range between Rs 966 and Rs 1,150.
State Bank of India (Rs 2,226.3)
The stock was hovering sideways around the Rs 2,300-resistance zone before declining by 3.5 per cent on Friday. That the stock failed to breakthrough the key short-term trend deciding zone around Rs 2,300 last week signals that short-term trend has reversed downwards. Besides, a negative divergence in the daily relative strength index backs this reversal. As mentioned last week, the stock can decline to Rs 2,050 or Rs 1,900 over the coming weeks.
Short-term traders can initiate short position on a close below Rs 2,200 levels with an initial target of Rs 2,150 and next target of Rs 2,100. Key resistances for the upcoming week are at Rs 2,270 and Rs 2,315.
Tata Steel (Rs 558.6)
Tata Steel prolonged its decline last week by tumbling Rs 60 or almost 10 per cent. With this fall, the stock appears to have formed a medium-term peak during mid of April, when it encountered resistance between Rs 660 and Rs 700. This resistance zone is important from a long-term perspective. Since then the stock has been on a short-term downtrend. However, it is approaching a medium-term support zone of Rs 540 and Rs 550. A 200-day moving average is also poised at Rs 550. This support zone can cushion the stock's decline in the near-term. A reversal from this support can lift the stock temporarily to Rs 590 or Rs 600. Fresh positions may be avoided as long as the stock trades in the range of Rs 540 and Rs 590. Significant supports for the week are Rs 523 and then Rs 500. Resistances are pegged at Rs 600 and Rs 640.
Infosys Technologies (Rs 2,619.6)
The stock toppled Rs 116 or 4.2 per cent last week and is nearing the lower boundary of the band between Rs 2,600 and Rs 2,850. It has breached its 21- and 50-day moving average and is hovering slightly below those levels. The daily indicators are entering in to the negative territory signalling weakness in the stock price. A strong close below Rs 2,600 would pull the stock lower to the support zone between Rs 2,520 and Rs 2,500 as stated last week. Short-term view will turn negative only on an emphatic decline from this level. On the other hand, a reversal from Rs 2,600 can take the stock higher. Immediate resistances are at Rs 2,695 and Rs 2,750. —
Sizzling stocks: Reliance Natural Resources (Rs 52.7)
The stock started the week on a positive note but later encountered significant immediate resistance at Rs 75. On Tuesday it fell 7 per cent albeit with good volume. After taking a pause around Rs 68 for a couple of sessions, the stock formed a downward flag pattern which is a continuation pattern. Reliance Natural Resources stock crashed almost 27 per cent on Friday breaking out of the flag pattern, following the announcement of Supreme Court verdict in the RIL-RNRL case. Volume traded was extraordinary on that session. The stock achieved its flag pattern price target of Rs 60 and decisively penetrated its key medium-term support around Rs 60.
From its June 2009 high of Rs 112, the stock has been on an intermediate-term downtrend, shaping lower peaks and lower troughs. Overall, the stock dropped 26 per cent last week and is trading well below its 21- and 50-day moving averages. In the medium-term, the stock can decline further to a significant support level of Rs 40. A strong weekly close below this level will drag RNRL lower to next support level of Rs 20. Immediate resistances are at Rs 56, Rs 60 and Rs 65.
Engineers India (Rs 497)
This stock astounded traders during the last two trading sessions of the week recording almost 43 per cent from its intra-week low to intra-week high, while the broader markets slipping lower. After shedding some gains, the stock ended gaining Rs 86 or 21 per cent last week. Since the October 2008 low of Rs 50 (adjusted price), the stock has been on a long-term uptrend. In January, the uptrend accelerated as the stock witnessed sharp rally. Investors with a long-term perspective can consider holding the stock as long as it trades above the floor of the gap formed in January 2010. This floor which was Rs 297 will be the stop-loss. Medium-term investors can hold the stock with stop-loss at Rs 420.
At this juncture, short-term traders can book some profits on failure to move above the immediate resistance at Rs 520. Short-term stop-loss for the stock is Rs 480 and the target is Rs 538. A move beyond Rs 538 can take the stock higher to Rs 557.
Consider shorting Bank futures, Suzlon
Stock strategy
Bank Nifty (9,297): After touching its 52-week high of 9,932.15 in April, the index has been on a downtrend. The outlook appears negative as long as Bank Nifty stays below 9,575.
However, it finds immediate support at 9,050. A drop below that level (on a closing day basis) could weaken it sharply to 7,520. On the other hand, only a close above 9,575 would negate the downtrend. In that event, it could reach a high of 10,525.
F&O Outlook
The Bank Nifty futures have been accumulating open interest positions along with fall in value. This indicates accumulation of short position, thus painting a negative picture. Among the options, calls witnessed higher accumulation, signalling negative bias. However, the 9,000 put has the highest number of shares in open interest. This indicates that Bank Nifty could see a support around this level.
Strategy: Traders can consider going short on Bank Nifty futures keeping the stop-loss at 9,575 and can book profits at 9,050 and then at 8,750. Market lot is 25 units per contract. This strategy however is only for high-risk traders as Bank Nifty is a high beta index.
Traders can also consider writing current month Bank Nifty 9,600 call, which closed Friday at Rs 93.
Suzlon (Rs 67.65): The stock has been declining steadily since mid-April. We expect the stock to weaken further from current levels. It now faces a strong support at Rs 58-60 levels, and a resistance at Rs 75. Only a close above Rs 75 would change the current negative momentum on the stock.
F&O pointers: The Suzlon futures (market lot 3,000) witnessed unwinding of long positions along with fall in price on Friday. Option trading was skewed towards bears as the calls witnessed higher accumulation. Unwinding in 65 put indicates that the stock could dip below that level easily.
Strategy: Consider going short on Suzlon futures with a stop-loss at Rs 70 for a target of Rs 60.
Follow-up: Last week we had recommended shorting Bharti Airtel and Apollo Tyres. Both the positions are currently in-the-money. Hold the positions with a revised stop-loss of Rs 298 and Rs 67.5 respectively.
Global cues to track
Investors who wish to take the direct investment route to equity should keep an eye on the developments taking place in global financial markets.
It is no secret that Indian stocks dance to global tunes. Global investors with interests in assets across the world are simultaneously watching the developments in every part of the globe, be it London or Kyrgyzstan, and responding accordingly.
A skirmish in even the remotest location elicits instantaneous reaction from every asset class, and Indian stocks are not spared.
It is therefore necessary that investors who wish to take the direct investment route to equity should keep an eye on the developments taking place in global financial markets. But it is next-to-impossible to monitor all the data points on a daily basis.
The way to circumvent this difficulty would be to keep track of few indicators or indices that can give you a broad idea of the direction in which the global markets and economy are headed.
Global benchmark indices
The primary indicator of the trend in overseas stock markets is the benchmark indices in various countries. Since the movement of US equity markets have a great influence on the stock price movement in other regions, it will do well to monitor the major US indices such as the Dow Jones Industrial Average and the S&P 500. The closing level of this index sets the tone for the Asian and European markets for the next day.
You could also keep a close tab on the indices of markets that trade at the same time as the Indian markets. A knee-jerk reaction in these indices causes a similar reaction in our markets as well.
Other benchmarks that can be tracked are the MSCI Emerging Markets Index and the MSCI BRIC Index. Since a chunk of overseas funds flowing to the Indian stocks are routed through emerging market (EM) or BRIC funds, the destiny of our stock prices are closely intertwined with our EM and BRIC brethren.
CRB Index
The world of commodities is as diverse and complex as equities. Movement of commodity prices in overseas markets affect the domestic prices too. To get a bird's eye view of the movement of the commodity universe, investors could track the Thomson Reuters/Jeffries CRB index.
This index captures the movement of 19 commodities traded on major international commodity exchanges and helps investors gauge the direction of commodity prices.
For instance, this index was surging higher in the first six months of 2008. Commodities including crude oil had a fantastic run in this period as global investors shifted from equity to commodities.
But the CRB index lost almost 50 per cent of its peak value in the second half of 2008 capturing the sharp correction in commodity prices in this period.
Dollar Index
Yet another index that has caught the fancy of stock market investors in recent times is the dollar index. It has been observed in recent past that rising risk appetite causes money to flow out of US treasury and money market instruments in to equities, causing dollar to appreciate and equity prices to fall. The reverse takes place in times of rising risk aversion.
This link makes it important that investors watch the greenback closely. This can be done through the dollar index.
This index captures the relative value of the US dollar against a basket of currencies comprising the Euro, Japanese Yen, Pound Sterling, Swedish Krona and Swiss Franc.
It can be observed that the dollar index is rising since last December. Equity markets have turned choppy in this period. Further strength in this index could spell trouble for stock prices and vice versa.
CBOE VIX
The Chicago Board of Options Exchange's volatility index or the CBOE VIX is also becoming a familiar name among the stock market fraternity in India.
This index, also known as investor's fear gauge, captures the sentiment among the investors by using the option premiums of S&P 500 index. The CBOE VIX tends to decline when stock prices are surging higher and it tends to shoot up in times of market declines.
This index surged to a peak of 89.5 on October 24, 2008. This was the day when stocks across the world touched a nadir on fears of a deep-rooted depression in global economy. Incidentally, the CBOE VIX is trading just above the bull-market range between 10 and 15 over the last two months.
Baltic Dry Index
This index is a favourite among the seasoned stock market participants as it is considered a lead indicator for economic activity.
The Baltic Dry Index published by the Baltic Exchange in London tracks the price of moving raw materials such as coal iron ore and grain by sea. It covers 26 shipping routes and the entire gamut of shipping vessels.
Since dry bulk materials are the inputs for intermediate and finished goods, the cost of moving these goods provides a good indication of economic expansion or contraction.
From the peak of 11,793 in May 2008, this index crashed to 683 in the second half of 2008 when global economy began contracting and recession was looming large.
Slew of stimulus measures by countries across the world has helped the BDI recover about one-third of these losses in 2009.
But the movement of this index has remained choppy since June 2009 indicating that global economy is still not out of the woods.
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