The Sensex may test new lows as the stock market doesn't seem to have got over the war fears yet
War in the Middle East appears almost certain now. At least, the global markets think so. Equities are falling and the price of oil is rising. This week, the Sensex dropped by 1.72 per cent to 3223.41 points while the Nifty reacted more sharply by losing 2.22 per cent and closing at 1034.1. The Defty pinpointed the turmoil in money markets by losing 2.33 per cent and reversing the recent trend of a strengthening rupee.
Breadth was very poor, volumes were minimal and the put-call ratio moved up towards the oversold zone at 0.5. There were few buyers and the Iraq crisis seems to have aborted the traditional pre-Budget rally.
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The broad-based BSE 500 was down by 2.28 per cent.
Outlook: The Sensex and Nifty are depending on support near their respective 200 DMAs. The Sensex seems to be holding at around 3225, which is almost exactly where the exponential DMA would be. The Nifty has already pierced its own 200 DMAs, and given that Nifty is the broader index with greater global exposure, the signal is worrying.
An explicit war would certainly push the indices lower - 3100 Sensex levels (990-1000 Nifty) is a possible support. In between, there is support at 3150 for Sensex and 1020 for nifty. It would be sensible to be prepared for the testing of these levels during the next couple of weeks.
Rationale: The US will probably continue to lobby for international support for a while. Until the situation is resolved, markets will remain nervous.
Counter view: In case the US backs off, markets will revive. The Sensex could easily rise till 3315 and quite possibly past 3500 if there is a soft Budget and no war. But this doesn't appear likely.
Bulls and bears: Every sector was hit and the most prudent thing is to identify lower support levels and wait. Among the few stocks to buck the downward trend were Bharat Forge, HDFC Bank, ICICI Bank and Thermax; Tech stocks appear to be vulnerable but no sector has escaped the sell-off. Bank stocks were hit by the bond market crash which will impact its profits. Oil stocks look interesting - ONGC is a hedge against rising crude prices and refiners like BPCL and HPCL should take a sharp downward plunge as the crisis builds up.
Derivatives are ideal in situations like this. The March Nifty futures appear a good buy at 1043 levels - either way the crisis should be over and the market back in some recovery mode by end-March.
The previous srecommendation of a Texas Hedge: "Buy February 1040 Nifty put and sell February 1080 call" is heavily in the money. Cash the position. Given the likelihood of further diplomatic confusion during the next fortnight, perhaps an even more aggressive Texas Hedge of "Buy February Nifty 1030 put (approx Rs 8.50) and sell February Nifty 1050 call (around Rs 9)" is possible. Cash the premium difference if the market drops further and be prepared to cover if the Nifty rises past 1045 and hope that any big rebound will only occur after the call expires.
MICRO TECHNICALS
Bharat Forge
Current price: Rs 250
Target price: Rs 275
The stock has climbed steadily from Rs 180 levels in late-November and hit resistance around the Rs 250 mark. It is finding support on a 45-degree trendline on every decline. There is reasonable support at the Rs 240 levels. It is difficult to project exact targets from this sort of formation but a tentative target of Rs 275 is possible if the stock closes above Rs 250 twice in succession. Go long with a stoploss at Rs 240.
Cipla
Current price: Rs 781
Target price: Rs 735
The stock has taken a massive hammering, declining from Rs 950 levels since early January. It is at an annual low. There is historic support in the band between Rs 725- Rs 735. There seems to be enough bearish impetus to force prices down to those levels. There's insufficient liquidity in Cipla derivatives to play that market and shorting a relatively illiquid stock is dangerous. Wait until Rs 735 levels are hit and then go long.
Hero Honda
Current price: Rs 206
Target price: Rs 200/180
The stock has hit successive annual lows on extremely high volumes