Sensex (10527.8)
Last week’s rout in stock prices was on a scale that none of us have witnessed in our lifetimes. Sample this, the Dow Jones Industrial Average declined 18 percent, its worst weekly decline ever, Nikkei crashed 18 per cent in just three sessions, the unshakeable DAX, the German stock index, recorded a 21 per cent weekly decline and the volatility index of Chicago Board Options Exchange, the investor’s fear gauge, touched 77 on Friday. This index has not risen beyond 48 in the last two decades.
It was capitulation with a capital C as investors abandoned equities and stock prices were sucked in to a black hole. The decline was broad-based, giving investors no place to hide. The selling was spear-headed by the FIIs who have already pulled out close to $1 billion in October so far. The tally of net outflow this year has crossed $10 billion. Static open interest shows that traders are equally bewildered by the market’s moves.
With the breaking of the 12000 bastion and the 2000-point weekly slump, the possibility of resumption of the structural up-trend in the near future appears remote. Sensex closed emphatically below 12000 on Monday and went on to record a trough at 10240 on Friday. Oscillators have moved deep in to over sold zone, but the downward momentum is not showing any sign of abating yet.
The movement of the index last week has resolved the quandary that we were mulling over – whether the second leg of the correction from 21206 peak has ended at 15579 or if it will continue for a few more months resulting in a range between 12000 and 16000. The breadth, swiftness and the wide-spread devastation of the move last week leaves no room for doubt that the third wave from the 21206 is currently unfolding. We had indicated in our column dated September 28, 2008 that the minimum target for this wave was 10207. This target was achieved last week. Since we are reviewing the long-term counts in a separate column, we will stick to medium and short-term view in this week’s index outlook.
Both medium and short term trends are down. However, the index is approaching a band where a cluster of long-term supports are positioned. The levels where medium-term supports can be expected are - 9972 (July 2006 trough), 9700 (61.8 per cent retracement of the up-move from 2001 and 8800 (trough formed in June 2006). Even if the vertical decline halts at either of these levels, there would be a period of intense volatility for a few weeks before a bottom is formed.
The resistances for the week ahead would be at 11433 and then 11753. Failure to move above these resistances would mean that the down trend would continue. The negative medium term outlook will be mitigated only on a weekly close above 12500.
Nifty (3279.9)
Nifty declined below the 3800 level on Monday and recorded a trough at 3198.9 on Friday, way below our outermost medium-term target. Though we were anticipating a decline, the swiftness definitely took us by surprise. The supports on the long-term charts for the Nifty are now at 2940 (61.8 per cent retracement of the up-move from 2001) and then at 2595 (June 2006 trough). The medium term outlook will turn positive only on a weekly close above 3800.
Near term resistances would be at 3530 and 3610. Reversal below these levels will indicate further weakness. Subsequent resistance is at 3879.Global Cues
Most global indices lost between 15 to 25 per cent last week, proclaiming it as the worst week ever for stocks. The DJIA sliced through the support band between 10200 and 9900 to an intra week trough at 7882. The four-year old bull-market in DJIA has been decimated with the index just a whisker short of the 2003 trough at 7416. We are now staring at the possibility of a multi-year bear market in DJIA that corrects the entire up-move from 1932. The situation is similar in FTSE. Italy’s MIBTEL index has already reached its 2003 trough.
Asian and Latin American markets were relatively resilient, having yielded about 60 per cent of the gains made since 2003. Nikkei is the only exception, the index is just 600 points above its 2003 trough. Commodities too reeled as risk aversion spread to all asset classes. CRB index declined 9 per cent. This index has now given up more than 50 per cent of the gains made since 2001.
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Source:BusinessLine.