http://www.thehindubusinessline.com/iw/2010/05/30/stories/2010053051370900.htm
*Index Outlook: End of correction? * ** ** ** ** ** ** ** ** ** *Sensex (16,863.06)* The keystone of technical analysis is the belief that news flow is only incidental and stock price movements are governed by the twin forces of demand and supply. This fact was borne out yet again by the movement in equity markets this month. Global benchmark indices were precariously poised at critical resistances towards the end of April and demand was waning with investors running out of reasons to buy stocks. We had pointed out the psychological signals of a market on the brink of a correction in our May 2 edition. That the market decided to take European debt concerns and the plunging euro more seriously was just an excuse to drum down stock prices to more reasonable levels. Foreign institutional investors led the (may)hem by pulling out around Rs 12,658 crore this month. There was, however, net inflow of Rs 410 crore on Friday. Volumes hit record levels in the derivative segment. The June series in the derivative segment opens on a fairly heavy note over Rs 1 lakh crore. But high index put call ratio implies that short positions dominated the roll over denoting lower risk to the market. Momentum indicators took a severe hit over the past weeks with the 10-week rate of change oscillator moved in to the bearish zone implying the onset of a medium-term correction. What is more worrying is the 10-month rate of change oscillator moving down close to the zero line. This indicator moving in to negative territory would be greatly detrimental to the long-term trend in our market. Daily oscillators are poised in the neutral zone on the verge of entering the bullish zone. The much-awaited correction is here and the Sensex has already declined 11 per cent from its recent peak. That is in line with the pullbacks witnessed in October 2009 and January 2010. In terms of retracement of the previous up-move, it is only 20 per cent. While the magnitude of this correction is insufficient, the time taken (since last October) is adequate to qualify as medium-term correction. The question is whether the correction could prolong from these levels? We had been discussing an A-B-C flat formation in the Sensex from November lows. It is obvious that this formation completed at 18,048. What can follow now is, A short X wave that can terminate anywhere around current levels followed by another flat or a triangle that can translate in to sideways move between 15,500 and 18,000 for few more months. Sharp decline below 15,000 will mean the end of terminal corrective and the onset of a deeper decline with minimum target of 14,227. The week ahead should help us in understanding the medium-term trajectory for the index better. *Short-term* The Sensex is in the recovery mode over the last three sessions but this has not helped reverse the short-term downtrend yet. The index has very strong resistance in the zone between 16,750 and 16,900 where the 200-day moving average is also positioned. The test for the index early next week would be if it could move above this zone. Subsequent targets are 17,033 and 17,249. The near-term view will turn positive only on a close above 17,250. Investors ought to get cautious if the index fails to move emphatically above 17,000 next week. Downward targets in this scenario are 15,601 and 14,804. Immediate supports would be at 16,338 and 15,960. *Nifty (5,066.5)* The Nifty reversed higher from the intra-week low of 4,786 last week. A three-wave formation was completed at this low with the relationship between A and C waves at 1:1. It is yet to be determined if the rally over the last three sessions is a pullback in a downtrend that began at 5,399 or another leg of the sideways move since October that can take the index towards a new high once again. Key resistances for Nifty in the week ahead are 5,123 and 5,164. The short-term view will turn positive only on a close above the second resistance. Failure on part of the index to make any significant headway next week will mean that another sharp down move is in the offing that can drag the index down to 4,698 or 4,464. Medium-term targets based on retracement targets are 4,542 and 4,300. But the index could remain in a broad sideways move between 4,700 and 5,400 for a few more months too if the correction is shallow in magnitude but long-drawn, time-wise. *Global Cues* Most benchmarks were hovering indecisively close to the upper end of their intermediate term up-trends when the month of May began, leaving investors guessing about the direction in which it could break-out, the down-move in global equity indices in May has proved with certainty that the rally that began in the first quarter of 2009 is complete. Many benchmarks are down between 10 to 20 per cent from their 2010 peaks. But investors can take succour from the fact that most benchmarks have already retraced about one-third of the previous uptrend and are trying to stabilise there. The European indices are worst affected in the rout with the DJ Euro STOXX 50 having given up half of the gains recorded last year and Greece benchmark close to its 2009 low! The fragility of investor sentiment was aptly captured by the CBOE volatility index that gained a whopping 210 per cent from the April low of 15.5 when it recorded the peak of 48.2 on May 21. A weekly close above 45 is however needed in this index to signal the resumption of the bearish trend in equities. In our May 2 edition we had noted that, “The Dow would have trouble moving above 11300 just yet and a medium term correction is overdue. A decline to 10,720 or 10,390 is possible over the next month. The short-term trend will however turn downward only on a close below 10,390. Subsequent target for the index is 9,835.” The Dow recorded an intra-day low of 9,774 on May 25 and is on the path to recovery since then. A three-wave flat correction was completed in the Dow at that point and the index has retraced about 30 per cent of the uptrend since last March. Bulls have the chance to fight-back from here. Immediate resistance for this index is 10,340. Inability to cross above this level would imply that the down move can intensify while move above will take the index to 10,700. The Dow reversing lower from its 200-day moving average on Friday is not a good sign. The outlook will stay circumspect as long as the Dow trades below 10,700. — Lokeshwarri S.K -- You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. 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