Index Outlook: The long-awaited correction

Sensex (15,896.3)

The breezy roller-coaster ride that we had expected turned in to a scary hurtle downward as the Sensex plunged 914 points last week recording the largest weekly decline in the last three months. The cut was much deeper in mid and small stocks especially those reporting adverse earnings as tolerance to negative news nosedived. The truncated week ahead is likely to be influenced by the Federal Open Market Committee meeting scheduled next week and the signals that are flashed from there.

Sudden reversal in stock prices made volumes soar sky-high, especially in derivative segment. Volumes in futures and options segment reached record levels mid-week close to the expiry of October contracts. The vicious side of the market was amply demonstrated in the way it waited for the belief in the current rally’s invincibility to get all-pervasive before reversing lower: waiting for the last bear to turn in to a bull. Sensex’ close below the 50-day moving average is a negative as is the close below the previous peak of 16,002. 10-day rate of change indicator declined in to the negative zone for the first time since August and the 14-day relative strength index has declined to 32. The weekly oscillators are however still in the positive zone implying that though the short-term trend is very weak, the medium term trend is not overtly so yet.

Though we had anticipated a correction last week, the magnitude was far greater than envisaged. We had expected a terminal corrective wave that moved sideways for a few weeks before the move from July lows ended. But the decline last week throws up a zigzag formation from July lows that could mark the completion of the C wave from March lows.

But we will wait for a confirmation of one more week to see if this decline prolongs and leads the index to a firm close below 16,000. Another fight-back by the bulls from these levels can result in a sideways move between 16,000 and 18000 for the rest of this year, indicated in our previous columns.

If the Sensex records a strong close below 16,000 next week, it would mean that an intermediate term correction is in progress that has the minimum targets of 14659 and 13885 – the opportunity that those who have missed the rally so far, are waiting for.

A rebound next week can take the Sensex higher to 16,450, 16,650 or 16,848. Failure to move above the first resistance would imply that weakness will persist to drag the index down to 14917 or 14740.

Nifty (4,711.7)

It was a harsh 285-point tumble in the Nifty last week. The supports at which we had expected the index to halt were pierced effortlessly.

We had expected one more leg higher to 5200 or 5300 followed by some sideways movement before the entire move from the 3918 low ended. But the decline last week implies that the move from this low has ended at 5182. It is a little early to decide if this is the end of the rally that began in March. The current decline needs to prolong next week and Nifty needs to record a strong close below 4700 to signal an intermediate term correction that has the minimum targets of 4389 and 4170.

The short-term trend in the index is down. A brief pull-back can take Nifty to 4876, 4940 or 4993.

Failure to move past the first resistance would be the cue to initiate fresh shorts with a stop at 5000. Downward targets for the week are 4581 and 4497.

Global Cues

The much-awaited correction finally materialised in global equity markets and many benchmarks gave up over 5 per cent last week. CBOE Volatility Index jumped above 30 on Friday, the highest level seen since this July.

Key resistance for the VIX is at 33 where the 200-day moving average is positioned. Close above this level will imply that the investor sentiment will stay edgy for a few more months.

Surprisingly the chart of the Dow appears much more resilient when compared to other global indices.

The short-term trend has been roiled by the 250-point decline on Friday but the index is holding above the 50-day moving average at 9725. Oscillators are however pointing towards the decline continuing in the near term. Medium-term target for the index is 9350.

Latin American benchmarks recorded deep cuts following decline in commodity prices.

Asian markets did not fare too badly last week though some such as the Seoul Composite Index, Thailand’s SET and Sri Lanka All share Index are already in a medium-term down trend.