There may be some recovery due to short covering but the technical signals are bearish.
The market slid in a lacklustre week of trading with the Nifty falling 5.3 per cent to close at 2,678.55 points while the Sensex dropped 6.9 per cent to close at 8,674 points. The Defty lost 6.1 per cent as the rupee slid lower.
Volumes were low and breadth was negative with advances outnumbered by declines. The FIIs and domestic institutions remained net sellers. Smaller stocks lost more ground than pivotals with the Junior down 7.5 per cent and the BSE 500 down 6.6 per cent.
Outlook: There may be some recovery due to short covering in a truncated settlement week. But the technical signals are bearish. The market is likely to trade between 2,500-2,850 with a downside bias.
Rationale: The market faces strong resistance at 2,850 and any rise due to short-covering is likely to terminate there. It is likely to test support on the downside at the 2,500-2,550 mark if there is further selling and that looks likely. Volatility, which has been low in the past week, is likely to rise.
Counter-view: Any breakout and close above the 2,850 mark could propel the market up by about 300 points till around 3,150 level. Conversely, a drop below 2,500 will probably lead to a test of the October 2008 lows of 2,250. Trading was marked by extremely low volume and volatility in the past fortnight. Settlement might just be that jolt that causes a higher volume breakout in either direction.
Bulls & Bears: Q3 results have been almost uniformly sub-par with pivotals like Reliance, Ranbaxy, TCS, HDFC, Hero Honda and Wipro showing signs of slowdown or stagnation. As a result, the trend of declines was spread across sectors. Real estate, metals and banks were badly hit – these have underperformed over the past four months. However, there were few overall winners and no single sector showed defensive strength.
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Next week, the bulls will have to seek out counters that attract short covering apart from some speculative long positions such as Cipla. The best short covering candidates could be banks and real estate. The private banks such as HDFC Bank and Axis now appear better placed than PSUs such as Bank of Baroda, Bank of India, Indian Overseas and Oriental Bank of Commerce, which have made recent downside breakouts. DLF has hit a potentially reliable support, ditto Educomp. Reliance Industries has also found some support.
Tempting short positions are easier to find. The oil PSUs are all downtrending. Zee Entertainment has also made a new downside breakout. So has Mahindra & Mahindra. Finally a word on Satyam, which is likely to see higher volatility in its last three sessions as a derivative underlying, After that, it's likely to see drastic decline in volume.
MICRO TECHNICALS
BANK OF BARODA
Current Price: Rs 232
Target Price: Rs 210
There has been heavy selling in this stock. It has a minimum projected downside target of Rs 210-Rs 215 though it has some support at Rs 225. Keep a stop at Rs 237 and go short. Increase the short position when the stock closes below Rs 225.
CIPLA
Current Price: Rs 186
Target Price: Rs 210
The stock has seen a sudden burst of high-volume buying. It's likely to hit resistance at Rs 195 but if that is overcome, there is a clear run till the Rs 210 level. The high volumes make the Rs 210 target look achievable. Keep a stop at Rs 180 and go long.
DLF
Current Price: Rs 161
Target Price: Rs 190
The stock is a reasonable support level. If it holds above Rs 155, it is likely to see short-covering that lifts it back up till the Rs 190 mark. Keep a stop at Rs 156 and go long. Note that if DLF closes below Rs 155, the stock could drop till the Rs 125 mark.
MAHINDARA & MAHINDRA
Current Price: Rs 264
Target Price: Rs 245
Heavy selling has caused a downside breakout. The next reliable support is at Rs 245. This looks certain to be tested. If Rs 245 is broken, M&M could slip all the way to the Rs 190 level. Keep a stop at Rs 270 and go short
RELIANCE INDUSTRIES
Current Price: Rs 1,156
Target Price: Rs 1,215
The stock has seen some short covering in the past two sessions and the buying has come on high volumes. It's likely that the short covering trend will continue and push RIL temporarily above the Rs 1,215 mark. Keep a stop at Rs 1,140 and go long.