The much awaited rate hike in USA didn't have an immediate impact on stock prices in India. But by the end of the week, the market had weakened and it ended near the lower end of a trading range. A second externally bearish signal was the downgrading in weight of the Indian component in the Morgan Stanley Composite Index for Emerging markets. Foreign fund managers will tend to rebalance their portfolio downwards to come in line with the MSCI.
The Sensex ended the week at 4068.65 points with a loss of 0.94 per cent overall. The Nifty ended at 1282 points or a one per cent decline. The BSE200 and Dollex ended 1.61 per cent lower and 0.68 per cent higher respectively with the rupee rebounding from earlier lows. The broad-based BS500 gained 0.53 per cent.
The positive divergence of the BSE500 was not however backed by other breadth signals. The advances to declines ratio stayed negative with 514 stocks gaining in price while 838 stocks saw declines. Trading volumes saw some improvement although they weren't extraordinary.
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I think the market is settling into a trading range. It may have hit a significant bottom at an intra-day low of 3913 on Monday 15. But it does not appear to be poised for a big swing upwards. There is critical resistance all the way up from here.
I would expect the market to settle into a broad trading range between 3900-4750 for the next three weeks. Above 4800, there will be concerted resistance due to the 200 Moving Average, which is at 4805 and moving down and the double top at 4800 on April 27. A break above that would be the first sign of a new bull market. There is a theoretical chance that this sort of turnaround could occur sometime around June 10, calculating Fibonacci reversal timelines. There are more likely reversal points around September.
In the near future, there is resistance starting at around the 4250 mark. Except for Wednesday, the index has failed to break that barrier for some 6 sessions and it has closed below that mark since May 11. Trading in the first two sessions of next week would be defined by breakouts from the zone of 4000-4250. It appears that the bearishness has eased slightly so we could expect a small upside bias inside the trading range. There is a positive divergence on oscillators like the RSI and week ROC - they have started turning up from oversold regions even as the index dropped.
Let's look on the dark side. The bear market has been in force since late February. The total retracement has been 2237 points from a high of 6150 points. That is around 36 per cent. Not enough to be defined as an absolute bottom, especially since the bear market is only 3 months old.
Purely on chart patterns, the market could ease to around 3780, which would be 39 per cent down. Using Fibonacci retracement levels, calculated on the move between 2742 and 6150, the recent low has broken the 61.8 per cent retracement zone. The next level of support would be around 3884 - the 67 per cent point. Assuming there is no turnaround in June, be prepared to see those levels tested.