The smart reversal in indices prepares the ground for a surge to a new high

The bulls engineered a smart reversal in stock prices last week, helping the Sensex and the Nifty to close with gains, despite a quavering start.

The truncated week ahead could see indices edging a little higher from these levels. The Budget and the upcoming Parliamentary session are likely to keep investors riveted.

The good news is that the sun is shining bright once again on global equity markets. Major global benchmarks hit record highs last week; crude oil prices have recovered and the dollar is retracting.

Greece’s debt concerns have not yet been resolved. However, since the deadline for debt repayment is two weeks away, global investors seem happy, brushing the issue aside and making merry now.

That stock markets only mirror the emotions of the people transacting in it, was once again brought to the fore last week. Just as most men are able to shake off the gloom following any disaster in next to no time, Indian investors who were a bundle of nerves last Monday — at the prospect of a BJP rout in Delhi elections — grew cheerful on Tuesday as they hoped that the new setback will make the BJP government more serious about expediting reforms.

Macro data releases last week were not too encouraging. Retail inflation grew at a slightly higher 5.1 per cent in January and industrial production grew just 1.7 per cent in December, down from 3.9 per cent growth in November.

Foreign portfolio investors have turned net sellers in February in the secondary market. They however continue to love Indian debt, pouring $ 1.5 billion into Indian debt market in February. Turnover in both cash and derivative segment was strong last week.

With the December quarter earnings not too encouraging, India Inc is in dire need of a booster from the Budget. Else, stock prices can correct after the much-awaited Budget.

Oscillators in the daily chart are beginning to look up. But they are still in the bearish zone. Weekly oscillators hover in the neutral zone. But the negative divergence in weekly oscillators since last July implies that the medium-term trend could be in its terminal stages.

Sensex (29,094.9)

The Sensex hit an intra-week low of 28,044.5 before reversing smartly.

The week ahead: The Sensex followed our script pretty closely last week, sliding to 28,000 levels, where the 50-day moving average is positioned and is reversing higher from there.

So does this mean that the worst is over? Not really.

For the index is once again at a short-term resistance level of 29,155.

The inability to get past this level will drag the index lower to 28,000 or 27,355.

Fresh purchases should be made only if the index manages to close above 29,155 on Monday. Subsequent targets are 29,844 and 30,130.

Medium-term trend: The medium-term trend in the Sensex continues to be positive.

Since the index managed to hold above 28,000 last week, there is a possibility of yet another leg up that takes the index higher to 30,900.

Nifty (8,805.5)

The Nifty too reversed higher from its 50-day moving average last week to close sharply higher.

The week ahead: The Nifty moved in line with our expectation, reversing from the zone between 8,420 and 8,460. Despite the formation of three marching soldiers in the daily candlestick chart, traders holding long positions need to exercise caution.

The index is at key short-term resistance at 8,804. Reversal from these levels will mean that last week’s rally was a mere dead cat bounce.

The inability to get past this level on Monday will drag the index lower to 8,496 or 8,296.

On the other hand, if the index continues the current rally, next targets are 9,045 and then 9,401.

Medium-term trend: The medium-term outlook stays positive. But as we have been reiterating, the entire move from the August 2013 low is close to its termination point. The d-wave of the fifth appears to be in motion now. If the d-wave has ended last week, we will have the upper moving e-wave that can take the index to 9,028 or 9374.

That would set the stage for the perfect pre-budget rally we are waiting for, to be followed by a dramatic crash.

Global cues

Global benchmarks put up a strong show with most of them ending with gains. The CBOE volatility index fell below 15, reflecting investors’ optimism.

Germany’s DAX index managed to close at yet another record high last week. The index is on a roll this year, up 11 per cent since the beginning of this year. European markets are on the whole on a strong wicket; the DJ Euro STOXX 50 is up 9.5 per cent since the beginning of January.

It was a volatile week for US markets but the Dow recovered from an initial hiccup to close above the 18,000 mark. As indicated earlier, the index can now go on to 18,103 or 18,426.

The strength in the Nasdaq 100 is also worth taking note of. The index closed at 4,377, a level last hit in 2000; the 2000 peak for this index was 4,850.