More turbulence likely for equities

Volatility might continue as the Chinese market is expected to open sharply lower, following a long break

Indian equities are likely to remain under pressure next week, with the Chinese market set to open after a week’s break. Market participants expect a ‘gap down opening’ (the term for a financial security opening at a price  below the level it closed at on the previous trading day) for the Chinese market, which could negatively impact other Asian markets as well. The indices might dip further if global macros do not stabilise, they said.

“We are seeing lower-top lower-bottom formations and have seen a shift in put writing from 7,200 levels to 7,000/6,900 levels, indicating the support is shifting to lower levels. The VIX (Volatility Index) has risen by about 40 per cent in the past week, indicating high level of fear among traders and investors,” said Chandan Taparia, technical analyst, Anand Rathi Financial Services.

He added foreign institutional investors (FIIs) have been selling continuously in the cash market and buying in the index options, which means they expect volatility to continue. Sell-off by foreign investors, triggered by a drop in oil prices, have dashed hopes of any pre-Budget rally in the Indian markets.

In the year-to-date, FIIs have sold shares worth over $2 billion. Taparia feels the immediate support level for the Nifty is at 6,868, which was the high reached in April 2014 and also the 200 weekly moving average. If that support is broken, the Nifty could slip to 6,666.

“Only if the market sustains above 7,050 will we see a relief rally of 100-150 points due to short covering,” he said.

According to experts, the other worry is that the S&P 500, a key gauge for US stocks, is currently trading close to crucial support levels of 1,800. A move below these levels could lead to a sharp breakdown of another 200 points, which could spell bad news for global equities. The inability of global crude oil prices to hold their highs is another worry, they said.

“For any sustainable recovery, the Nifty should stabilise first but that seems difficult, considering the pace of decline in the past week. We expect the prevailing slide to extend further with next major support now at 6,800 in Nifty,” said Jayant Manglik, president, retail distribution, Religare Securities.

However, some experts believe the market might consolidate following  a sharp fall last week.

“After a sharp fall of about seven per cent last week, the chances of further downside are limited and the market is likely to consolidate. There might be a mild pullback, and if the market closes above 7,060, some amount of short covering could take the market up to 7,250 levels,” said Ashish Jha, technical and derivatives analyst, Centrum Broking.

Indian equities witnessed a blood bath last week on fears of a further US Federal Reserve rate increase on better-than-expected jobs data in the US, a potential bank default in the European Union, and poor earnings from domestic state-owned banks.

The Nifty broke the psychological level of 7,000, with bank stocks causing the most havoc. The Nifty closed the week down 6.8 per cent, while the Sensex lost 6.6 per cent in the week, posting their biggest percentage declines since July 2009.

“With the results season close to an end, we will not have significant triggers for Indian markets next week. Inflation data and data on IIP (Index of Industrial Production) will drive action early next week. Thereafter the expectations of the Budget,” said Ravi Shenoy, assistance vice-president, mid-caps research, Motilal Oswal Securities.

“Mid-caps have seen a massacre, as we have been warning in the past and we still continue to prefer to hide in large-caps or potential large-caps, where performance has been better than estimates,” he added.