Indices View

BL 25/1/09

 

Sensex

United Kingdom was the epicentre of the last week’s turmoil in financial markets. First it was the gargantuan loss recorded by Royal Bank of Scotland and then the official declaration of recession in the UK that sent European stocks reeling lower, dragging rest of the global markets along. President Barack Obama’s inaugural address only reinforced the view that the current crisis can not be wished away in a hurry. Sensex tumbled with the rest of global indices to close 650 points lower.

 

We have an action-packed week ahead with the Reserve Bank of India set to announce its monetary policy review statement on Tuesday and the expiry of January series in derivatives scheduled on Thursday. Volumes recorded last week indicate that investors and traders have withdrawn to the fence to wait out this bumpy period. FIIs are once more in the exit mode, having sold close to $1 billion in January.

 

A perusal of the monthly charts shows that the medium-term trend in the Sensex remains sideways between 8000 and 11000. There would be no need to press the panic buttons until there is a firm close below 8000.

 

But since the index is approaching the lower end of the medium-term trading range, a brief look at the long-term view is warranted here. The area around 8800 (June 2006 trough) and 9700 (61.8 per cent retracement of the bull market from 2001) are very significant long-term supports. The index has been oscillating around these levels over the last three months. As mentioned in our 2009 outlook published on December 28, 2008, this choppy move is the final stages of the down-move from the January 2008 peak. A more sustainable up-trend lasting a few months is likely once this volatility ceases.

 

The moot question is, where will the index bottom? The first target as discussed in our yearly outlook lies around 8000. Only if this level is breached strongly will the next target come in to play.

 

The decline and close below 9000 has made the short-term view overtly negative. Immediate targets for the down-move from 10469 peak are 8497, 7934 and then 7022. In other words, the area around 8500 and 8000 are strong supports from where a reversal is possible. Key resistance for the week would be at 9400 where the 50-day simple moving average is also positioned. The medium-term view can be salvaged on a rally past 9800.

 

Global Cues

Slew of weak corporate earnings and troubles in the UK took its toll on stock prices yanking most global indices lower. Dow Jones Euro Stoxx index declined below its November 2008 lows. Weakness was pronounced in European indices such as CAC, DAX, Russian RTSI, and Italian Mibtel index.

Despite a close below the key support at 8000 on the day President Obama was sworn in, the DJIA recovered to trade above this level for the rest of the week. As we have been reiterating, a conclusive close below 8000 is needed to drag the index to the previous trough at 7450.

 

Some Asian indices such as Jakarta Composite, KLSE Composite, Seoul Composite, Shanghai Composite, Sri Lanka All Share Index and Thailand’s SET are holding well above their previous year’s lows. Latin American markets were also resilient last week.

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