A spectacular global crash led to double-digit losses in the markets. Naturally that meant a new set of two-year lows. The Nifty was down 15.9 percent closing at 2,584 points while the Sensex lost 12.8 per cent and the Defty 17.8 per cent. The rupee dropped to its lowest-ever levels versus the dollar, going below the Rs 50 mark,
It was doom and gloom all round with the IT industry being the only gainer and advances vastly outnumbered by declines in a low volume market. The FIIs continue to be massive sellers and although domestic funds bought, it was nowhere near enough to balance the equation. The BSE500 was down 13.6 per cent and the Junior lost 12.1 percent.
Outlook: The downtrend has far exceeded target projections. Next week sees a truncated settlement and the likelihood of short covering. There could be a spectacular but short-lived recovery, pushing prices back to the 3,000 level. On the downside, if selling continues, the market could bottom at 2,400. Assume the range of 2,400-3,000 could be traversed.
Rationale: Next week has two effective sessions to settlement since Diwali trading is symbolic. There’s a lot of short interest, which will be covered. But selling against delivery could also have a downwards impact. Volume expansions and high volatility are givens. Making support-resistance projections with two-year old levels means high error margins. There’s little recent resistance until 2,950-3,050. That will be hit if short covering occurs and is enough to overcome the drag of sales versus delivery. Support on the downside is much more difficult to judge than upside resistance.
Counter-view: Despite the vertical drop, there hasn’t been a volume expansion. One would expect one panic session of high-volume selling – what is known as a selling climax. That could force prices down till 2350-2400. As mentioned above, supports are difficult to calculate. The intermediate downtrend has been in force for 10 weeks since the August 12 peak of 4649 and it could last another two weeks.
Bulls and bears: The IT sector has held its own, probably due to the rupee weakness. All other sectors have been pummelled and banking and realty have been hit hardest. But refiners, metals, engineering, telecom, etc, all present a depressing picture. Everything apart from IT is in a downturn and IT stocks will at best retain value rather than present an upside.
One can attempt to separate stocks into two sets. One set is of stocks that could drop further. The other consists of those that may have bottomed and seem capable of a pullback on potential short-covering. In all case, expect huge swings and keep appropriate margins.
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Among banks, SBI, PNB and ICICI all seem capable of dropping lower. However Axis Bank could see a pullback. In auto stocks, Bajaj may have bottomed, Hero Honda has hit a reasonable support level but M&M, Maruti and ancillary major Bharat Forge look to dip further. All the real estate companies seem to have downside left – DLF, Unitech and Parasvnath have already fallen lower than projected support levels.
Metals also appear to be in free-fall. FMCGs have seen selling against delivery as well as shorting with HUL, ITC and Dabur all dropping on high volumes. Bilt and Reliance Capital may see some support. Airtel and Idea could also attract short covering.
MICRO TECHNICALS
Bharti Airtel
Current Price: Rs 537
Target price: Rs 450
(downside), Rs 650 (upside)
The stock is likely to swing between Rs 450-650 with alternating bouts of heavy selling and short covering. Monday could open weak and end with a late recovery. Set a stop at Rs 550 and go short, covering below Rs 470. If you want a long position, try and enter below Rs 500 with a stop at Rs 470. Wednesday is most likely to see a big climb.
Hero Honda
Current Price: Rs 729
Target price: Rs 770
The stock has seen selling on rising volume but it may have reached a climax on Friday. The bounce on potential short-covering could push prices back till around Rs 770. Keep a stop at Rs 720 and go long. Cover above Rs 765.
ITC
Current Price: Rs 159
Target price: Rs 150
The stock has seen heavy selling with volume expansion. It has a downside target of Rs 150 where there is support. If there’s short-covering, the stock could pull back to around the Rs 170 levels. Keep a stop at Rs 162 and go short. Cover at Rs 150. If it closes below Rs 150 however, the next target would be Rs 130.
Reliance Capital Current Price: Rs 615
Target price: Rs 700
The stock appears to have bottomed after a sharp slide. Keep a stop at Rs 605 and go long. The upside could be around Rs 700. If the Rs 605 stop is broken, the next support will be at around Rs 525 so you could go short.
SBI
Current Price: Rs 1,165
Target price: Rs 1,000
SBI broke a key support at Rs 1,300 on heavy selling. It has a potential downside till the Rs 1,000 level. Keep a stop at Rs 1,180 and go short. Book partial profits at Rs 1,100 and again at Rs 1,050. Clear the position at Rs 1,000.