Stocks chill in hot summer

May 26, 2012:  

Investors wilting under the searing summer heat wave were further tormented by a steep petrol price hike last week. But this hike helped rein in the unfettered fall in the rupee. The India currency was threatening to spin below 56 against the dollar. Stock prices also recovered after the fuel price hike though the Sensex continued its jig around the 16,000 mark, keeping investors edgy.

Euro zone and its troubles continued to affect global financial markets. Worries over the health of Spanish banks and Greece' possible exit from the euro zone kept stock prices on a leash. Euro zone's PMI declining to 45.9 in May, down from 46.7 in April further roiled the sentiment in this region.

Cash volumes were very low last week. Action in derivatives picked up towards the weekend. FIIs were selling small quantities through the week. But the net FII outflow in May is at a very low level of $97 million. Open interest moved slightly higher above 1,30,000 crore. But low put-call ratio implies that the market is getting oversold at these levels.

The rupee's rout appears to have halted and that can provide temporary relief to stock prices next week. Expiry on May contracts can usher in some volatility. It would be good to bid adieu to May, a month that is known for its negative effect on the stock markets.

It could be good time to bring out your shopping list since the Sensex is approaching its long-term base around 15,000. Cherry picking is advised only when market is at its gloomiest best.

Oscillators in the daily chart reflect the change in the downward momentum. Rate of change oscillator in the daily chart is reversing higher from bearish zone. It is on the verge of moving in to the positive territory. Daily relative strength index is also attempting to move up from the oversold zone. Momentum indicators in weekly chart dipped in to bearish zone but they are moving sideways instead of moving any deeper in this territory.

The Sensex (16,217.8) is displaying resilience above the critical 16,000 level. We stay with the targets of 16,016 and then 15,080 for the current decline from 18,523 peak. As explained earlier, the index could form a higher bottom around 16,000. But if this level is breached, the index could form a low around 15,000. Many wave targets and supports also converge at this level making it a good point from where the Sensex can rebound.

Short-term resistances for the Sensex would be at 16,466, 16,670 or 16,872. Short-term view will turn positive only on a close above 16,872.

The presence of the 200-day moving average in that region makes it a very significant hurdle.

The halt last week appears to be a temporary pause. If rallies next week have trouble moving past 16,500 it will mean that there can be another decline to 15,725, 15,329 or 14873 before the index stabilises.

Nifty (4,921.4)

The Nifty did not slide further last week but there was no rebound either. The wave sequence that began from the 5,630 peak could still be evolving. Key hurdles for the Nifty next week would be at 5,000, 5,093 and 5,130.

Short-term traders can initiate fresh shorts if the index is unable to move beyond 5,000. That would mean that the index will decline to 4,757, 4,634 or 4,493 in the near term. Short-term view will turn positive only on a close above 5,130. The 200-day moving average positioned at 5,080 will also pose strong obstacle in the upcoming weeks.

Medium-term trend in the Nifty remains down and we stay with the medium-term targets of 4,884 and 4,600. Since the index is close to the first target, short sellers should watch out for sudden rebound from these levels.

Global Cues

Global markets halted their steep slide and etched minor gains last week. Greece continued to cast its shadow on the global market and cappedany significant up-move. CBOE volatility index declined slightly to end the week at 21.7, indicating that investor trepidation did not rise any further.

The Dow recovered from the intra-week low at 12,311. We stay with the view that the medium-term uptrend in the index will be threatened only on a strong close below 12,000. The key support from a long-term perspective is at 10,500. If the Dow manages to move beyond 12,700, it will denote that the index can move beyond 13,300 again in the upcoming weeks.

The dollar index gained against all major currencies including the euro. This resulted in the dollar index shooting higher to 82.6 last week. Key medium-term resistance for this index is, just above at 82.7.

If this level is crossed, the greenback can shoot higher against most other currencies, causing further deterioration in rupee value. Strength in dollar is resulting in gold moving lower. Comex gold has come close to its key support at $1,566. This level has supported gold in September 2011 and again in December 2011. Key long-term support for this metal is at $1,446.