Selling was witnessed in almost all asset classes on fears of global slowdown

 

 

 

 

It was an extremely turbulent week for financial markets as a wave of risk-aversion gripped investors. It would be wrong to dismiss this as just another short-term bout of volatility because the US equity market, that had so far held steady, joined in this time.

 

There was no place to hide as the selling was witnessed in almost all asset classes including equity, currency and commodity markets.

 

The trigger for this panic was ostensibly the slowdown in China. As the Chinese growth affects almost all economies, equity prices across the globe declined. The FOMC minutes of the July meeting stoked fears of global economic showdown further.

 

The CBOE VIX — the investors’ fear gauge — spiked sharply to 28 by the end of the week, indicating that the sentiment in the US market has shifted from greed to fear. This is the sharpest weekly increase — at 133 per cent — in many years.

 

Foreign portfolio investors have turned net sellers in both equity and debt market in August. The rupee weakened as a result, falling below the psychological 65 level against the dollar.

 

Now, a weak rupee is bad news for Indian companies due to the mountain of foreign currency borrowings they are holding and the extra money they have to pay for imported inputs.

 

This resulted in the equity market too diving sharply in the last two sessions. But it is not time to throw in the towel yet, if the technical charts are taken into consideration.

 

Both the Sensex and the Nifty have moved close to an important short-term support at 27,131 and 8,200 respectively. If the indices bounce from here, the short-term trend can be salvaged.

 

The key driver next week will be the rupee that is appearing quite vulnerable. As we have been reiterating, financial markets are likely to get increasingly jittery as the Fed’s first interest rate hike draws closer.

 

There is likely to be more fund outflows due to this, impacting the currency.

 

Investors should therefore brace themselves for a rocky September when a re-visit of the 7,900 level in the Nifty and the 26,300 level in the Sensex is likely.

 

The derivative expiry scheduled for this week will also usher in volatility. Open interest in the NSE derivative segment has moved close to ₹254,000 crore. This indicates heightened volatility as traders worry about their long positions.

How they oscillate

The movement of the market last week makes it obvious that the path of least resistance is now downwards.

 

The close below the 50- and 200- day moving averages is another setback for both the indices. With last week’s decline, the oscillators in the daily chart have moved into the negative zone. The lower peaks and troughs in the daily price rate of change oscillator imply that the index could decline further in the short term.

 

However, the weekly oscillators continue to be positive and are holding above the zero line. This means that those holding short positions need to be cautious. A reversal from these levels will add strength to the medium-term uptrend.

Nifty (8,300)

The Nifty lost around 218 points and closed on a weak note last week.

 

The week ahead: The Nifty has moved below the lower boundary of its short-term band at 8,350. But the index is currently poised above 8,217, its key short-term support. Traders can wait for a break below this level before initiating fresh shorts.

 

Targets on a break below 8,217 are 8,160 and 7,940.

 

Resistances for the week will be at 8,391 and 8,490. Inability to move above the first resistance will be the cue for short-term traders to initiate shorts with a stop loss at 8,500.

 

Medium term trend: The medium-term trend is currently under threat. The week ahead will indicate whether the down-move since July is the C wave down from the 9,119-peak or a part of the B-wave. The C wave down has the targets of 7,925 and then 7,475. We can expect a halt at the 7,900-8,000 band if the fall continues. If this level is breached, a fall to the 7,500 level is possible.

Sensex (27,366)

The Sensex too recorded a sharp decline to close the week 701 points lower.

 

The week ahead: The Sensex is halting at the important support at 27,154. Upward reversal from here can take the index higher to 27,684 or 28,023. Inability to move above 27,684 will be the cue that the index can record a sharp decline. Downward targets are 26,684 and 26,307.

Global cues

Global markets continued moving lower last week. Two consecutive weeks of decline have resulted in resumption of the medium term downtrend in most indices.

 

The cut in the US market was one of the severest in recent times. The Dow closed around 5 per cent lower for the week.

 

The fall last week establishes a medium-term downtrend in the index. Next key support for the index is at 16,000. Decline below this level will mean a fall below 15,000 levels.