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Sunday, September 21, 2008


Index Outlook (Source:

Sensex (14042.3)

The credit market turmoil reached a crescendo last week as two financial behemoths bit the dust and another was saved in the nick of time. Just when the entire financial sector in the US appeared to be imploding, sending stock prices plummeting across the globe, US lawmakers along with their counterparts in the rest of the countries went into an overdrive and announced a series of myopic and rather bizarre measures, that has pleased investors and helped the stock markets recoup losses made earlier in the week.

The Sensex halted just a whisker above the July low at 12558 on Thursday. The double-bottom formation around 12500 made the short sellers scurry for cover and the Sensex raced to a 12 per cent gain from Thursday’s low; in less than two trading sessions. High volumes in the last two sessions of the week indicates that investors were also bottom fishing at lower levels.

We have been juggling with multiple counts over the past weeks but the Sensex’ movement last week has resolved the quandary to some extent. The road-map over the medium-term could be thus,

* The preferred count is that the correction from the July trough is shaping as a flat pattern and the index would stay in the range between 12500 and 16000 over the medium-term. The minor C of this pattern that is taking the index higher from last week’s trough has the upper targets at 14453, 15624 and 16795. The recent peak at 15580 and the 200-day moving average at 16442 are the other resistances that this up move would have to grapple with.

* If Sensex fails to surpass 14450 over the next two weeks, it would lead to the assumption that the third leg of the down trend from January peak has resumed from 15580. A decline below 11000 is possible as per this count.

It needs to be borne in mind that even if the index moves sideways over the medium-term, the larger trend continues to be down since 21206-peak in January. This downtrend can resume after the completion of the current sideways move. An emphatic close above 16500 is required to open the possibility that this range-bound move is a base to launch the next leg of the long-term up-trend. We have also explained earlier that 12500 is a significant support on the long-term charts as it is close to the March 2007 trough and is the half-way point in the move from September 2001.

Over the short-term, Sensex will face strong resistance from the zone between 14300 and 14450. Inability to surpass this zone would be a sign of impending short-term decline towards 12500 once more. If this band is surpassed, the index can take a shy at the recent peak at 15100. Short-term supports are at 13509, 13146 and then 12558.

Events of the past week make it apparent that there are landmines strewn across the path of equities, at least for the near-term. Investors can definitely buy stocks with a long-term perspective but traders will do well to take a break until the volatility subsides.

Nifty (4245.2)

It was an action packed week for the Nifty as well. It declined to an intra-week trough at 3799 before rallying smartly to close with 16 points weekly gain. For the medium-term, the index can move higher to 4330, 4658 or 4986. The previous peak at 4649 and the 200-day moving average at 4908 will be other medium-term resistance levels.

The long-term trend continues to be down and this view will be mitigated on a strong close above 4900.

For the short-term, Nifty would face resistance from the zone between 4300 and 4350. A reversal from here will drag the index towards 3800 again. Interim supports are at 4090 and 3980. Target beyond 4350 is 4558.

Global Cues

As investor trepidation reached unprecedented levels, the CBOE volatility index zoomed to multi-year high peak at 42.1 on Thursday. Though it eased a little on Friday, the week’s close at 30.3 is still uncomfortably high.

The Dow Jones Industrial Average reversed from an intra-week trough at 10459 to end with a mere 34 point loss. Oscillator charts indicate that a fresh up-trend is in motion that can take the index to 11900 or 12200. Both these levels are, however, serious impediments from a medium-term perspective. The S & P 500 can attempt to rally to 1300 or 1350 over the medium-term.

The strong recovery on Friday has resulted in a bullish hammer formation in most indices, that is a bottom reversal pattern. However, the recovery has to sustain for two more week, to instil confidence. Many of the Asian indices recorded new troughs for 2008 but they recovered from key support areas in the long-term charts.

Crude recovered following the trough at $90 formed on Tuesday. Immediate resistance for the commodity is in the band between $110 and $112. A sideways move between $90 and $110 is possible for a few weeks. — Lokeshwarri S. K

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Posted by: Srikanthbabu Kaliki

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