After the market broke below the 3240 mark, the continued downslide this week was entirely predictable. When a trading range of some six weeks duration is breached a strong move results in the relevant direction.
Adding to the bearish pressure was bad news on the Nasdaq front and bad macro-economic data from USA. The starvation deaths in Orissa and the DPC arbitration demands didn't help improve sentiment either. The Sensex closed at 3198.4 after dropping to an intra-day low of 3166. This was a loss of 1.43 percent.
The Nifty dropped 1.76 per cent and closed at 1035.2 while the broad BSE 500 lost 1.84 per cent. The Defty dropped 1.85 per cent reflecting the rupee's plunge to an alltime low at 47.25. Worryingly, volumes rose along with the market fall. The breadth was terrible with the Advances being outnumbered 3:1 by declines. The volume expansion is fairly normal behaviour when a breakout occurs.
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It confirms the direction of the breakout. The Sensex also cracked an important support at 3185 on the way down although it recovered to close above that mark. It is now trading only 102 points above the 3096 low of April 2001.
There is one small indications that Monday's trading could involve a little technical bounce. The candlestick formation of Friday suggests the possibility although this is an extremely short-term indicator. There is powerful resistance starting around the 3225 level.
The medium-term indicators and also the long-term suggest a likely test of the 3096 mark. There is some weak support between 3120-3165. Going to long-term target calculation, there may not be a serious turnaround until January. Fibonacci time calculations do indicate a possible turnaround early next year.
However that doesn't necessarily mean that the market will spin down continuously over the next 3-4 months. More likely it will bottom and start range-trading again or even bounce. If the 3096 support is broken, the market will find support around 3025. Below that, a drop to 2850 would not be ruled out. Gann retracement level analysis doesn't help to pinpoint this level.
All of these supports are fairly close to the 50 per cent retracement level and an attempt at greater precision may be self-defeating. Pharma is one sector that could hold its own. Tech did bounce but very selectively from lower levels and the slightest bad news from USA will hit the ICE sector again.
Old Economy stocks also look in poor shape. Interestingly the Nifty futures are actually trading at a small premium to the spot Nifty. Usually in bearish phases, the index futures have gone into backwardation. This could indicate that the smart money expects a bottom in the next fortnight from within 5 per cent of current levels.