Bearish trend still in force

MACRO TECHNICALS

Chart patterns are clearly bearish as the indices hit new three-month lows.

A sharp drop on Friday confirmed the bearish trend is still in force. The Nifty closed with losses of 3.29 per cent at 1902.5 points while the Sensex lost an equivalent 3.03 per cent and closed at 6154.44 points. The rupee gained ground against the dollar despite a flat Credit Policy - the Defty lost only 3.21 per cent.

Breadth signals were mixed. Declines heavily outnumbered advances - that has bearish implications. The overall market put-call ratio as well as the Nifty PCR remained at oversold levels - this has bullish implications.

Simple momentum indicators like the ROC have actually moved up - a positive and bullish divergence. Volumes were above average but little can be read into high-volume signals in the settlement week.

Outlook: Chart patterns were clearly bearish since the indices hit new three-month lows. But next week could start with a small technical rally that terminates below Nifty 1975 (Sensex 6400) followed by another dip. Let's hope support at 1900 holds on the next dip.

Rationale: The intermediate downtrend started on March 11 (an intermediate trend can last between four and 12 weeks). There's strong support at 1900 (the latest bottom and very close to the Nifty's 200 DMA), and strong resistance at 1975 (the last peak). There are oversold signals that suggest a technical rally.

If the next rally crosses 1975, the lower tops pattern will be broken, suggesting a trend reversal. If support at 1900 is broken, the lower bottoms pattern will be reinforced, suggesting that things will get worse. Likeliest, the market will oscillate between 1900 and 1975, keeping us all on tenterhooks about the long-term trend.

Counterview: The market has already gotten bearish enough to suggest that the major trend is in trouble. If the bearishness lasts just a few more sessions, the bull run that started in May 2004 from a Nifty 1300 bottom will be over.

Bulls and bears: Very few companies have maintained a bullish trend through the carnage of last week. But a whole host of companies are sitting at strong supports. If one decides to hedge, Ashok Leyland, Concor, Cipla, Finolex and Nestle look the likeliest to continue an uptrend even if the index slides further.

As to possible technical rallies from support, Ranbaxy, Gail and TCS seem to have the most solid prospects of this. A third pharma major, Dr Reddy's looks quite weak.

MICRO TECHNICALS

CONCOR
Current price: 874
Target price: 935

The stock has proved counter-cyclical, rising from 795 levels in late March (when Nifty was at 1980) to 874 now (while the Nifty is at 1902). It stock has almost completed a bullish formation with a target of around 935. Keep a stop at 860.

CIPLA
Current price: 264
Target price: 270, 295

The stock has risen on good volumes. It has almost completed a bullish formation. The target would be around 295. But there's resistance between 265 and 270. Either accumulate with a stop at 260 or wait for a breakout past 270 before going long.

FINOLEX
Current price: 214.75
Target price: 235

The stock has risen along a 45 degree trendline from 165 to 215 with a perceptible rise in volumes. At 200, Finolex completed a formation with a target in the 235 range. On long-term weekly charts, there seems to be a potential target of 250. Go long and keep a stop at 205.

RANBAXY
Current price: 913
Target price: 980

The stock has fallen from 1100 levels to a low of 870 on Thursday-Friday. There is a suggestion of short-covering in the past two sessions as volumes have expanded with the stock closing higher than it opened. Keep a stop at 865 and go long.

TCS
Current price: 1130
Target price: 1170, 1200

The stock was hammered down on massive volumes from 1400 to 1090. It has seen a reversal pattern in the last two sessions. On Thursday, the open and close were around the same levels despite a large daily range. On Friday, prices moved up with open and close again around the same level. However, this pattern will run into strong resistance at 1170.

Double top

CLASSROOM

The double top is a reversal pattern that forms after an extended uptrend. The pattern is made up of two consecutive peaks that are equal, with a moderate trough in between.

Though there can be variations, the classic double top marks an intermediate change, if not long-term change, in trend from bullish to bearish.

Many potential double tops can form along the way up, but until the key support is broken, a reversal cannot be confirmed. With any reversal pattern, there must be an existing trend to reverse. In the case of the double top, a significant uptrend of several months should be in place.

The first peak should mark the highest point of the current trend. Such a peak is normal and the uptrend is not questionable at this time. After the first peak, a decline takes place that ranges between 10 and 20 per cent.

The ascent from the lows occurs with low volume and meets resistance from the previous high. The possibility of a double top exists only after the breaching of resistance. The time period between peaks can vary from a few weeks to many months.

While exact peaks are preferable, there is some leeway. Usually a peak within 3 per cent of the previous high is adequate. The subsequent decline from the second peak should witness an expansion in volume and/or an accelerated descent where a support test is necessary.

Even after trading down to support, the double top and trend reversal are still not complete. Breaking support from the lowest point between the peaks completes the double top. This, too, should occur with an increase in volume and/or an accelerated descent. Broken support becomes potential resistance.

The peaks should be separated by about a month. If the peaks are too close, they could just represent normal resistance rather than a lasting change. The low between the peaks should fall at least 10 per cent.

Declines less than 10 per cent may not be indicative of a rise in selling pressure. If the trough drags on a bit and has trouble moving back up, demand could be drying up. When the price ascends, a contraction in volume should be looked out for as an indication of weakening demand.