Bear market confirmed by southern breakout

MACRO TECHNICALS

After several weeks of range-trading, a clear trend was finally established post-Budget. Unfortunately, it was down. The Nifty dropped to 4,771.6 points, a week-on-week loss of 8.65 per cent. The Sensex was down 9.12 per cent at 15,974.52 points. The Defty lost 10.04 per cent as the rupee weakened as a consequence of dollar outflows caused by foreign institutional investor (FII) selling. Domestic funds were also sellers.

Background and breadth indicators were also poor. Volumes remained low, and declines far outnumbered advances. Smaller stocks lost more ground. The Nifty Junior was down 14.45 per cent and the Nifty Midcaps was down 11.31 per cent. The BSE 50 lost 10.59 per cent. The BankNifty lost an extraordinary 16.35 per cent while the CNXIT was down 5.59 per cent "� relatively little damage due to the weaker rupee.

Outlook: Several key supports were busted as the market moved decisively outside the trading zone of 5,000-5,600. There is support at current levels and good support at 4,600. While there could be a short-term recovery, the upside will be restricted by resistance between 4,900-5,000. A major bear market is confirmed.

Rationale: The breakout has pulled the indices decisively below respective 200 Day Moving Averages (DMA) and those will be resistances on a pullback. In the short-term, momentum indicators are oversold and this could trigger a short-term recovery. In the long-term, sequential closes below the 200 DMA confirms a major bear market.

Counter-view: Liquidity will be a key factor in any recovery. But volumes are down through the past 6 weeks and that is a bad sign. It would be a positive signal if the market climbed back to 5,000-plus and closed above the 200 DMA. But that looks unlikely since it would require substantial volume increase.

Bulls and Bears: A few sectors have defensive strength. Pharma and auto shares look to have the best insulation along with FMCGs. Ranbaxy is looking like a counter-cyclical, as is Aurobindo. Metals look more risky but Hindalco, Sterlite, Sesa Goa and perhaps, Tata Steel are reasonable bets for aggressive long traders. Dabur India and HUL are defensive counters. In the auto sector, Hero Honda and Bharat Forge seem decent defensive bets.

On the flip side, bank stocks were butchered with panic across the board. There could be a smart pullback here eventually due to short-covering. The stocks to watch are SBI, Bank of Baroda, Kotak and of course, ICICI itself. Reliance Capital could also respond to the buyback offer, and LIC Housing is also likely to do beat other financial stocks.

MICRO TECHNICALS

Aurobindo Pharma
Current Price: Rs 306.20
Target Price: Rs 318

The stock has been consolidating along strong support between Rs 290-300 after a drop from the Rs 550-plus levels of early January. It has started generating high volumes and may be good for accumulation over 25-30 sessions. Daily volatility will be high. Traders can keep a stop at Rs 295 and go long. Cover above Rs 318 where there is resistance, although the stock could hit Rs 325 intraday.

Bharat Forge
Current Price: Rs 277.10
Target Price: Rs 305

The stock is consolidating and forming a bottoming formation at the current price levels. There is potential upside till Rs 305-310. The downside would be about Rs 265. Keep a stop at Rs 265 and go long with a 10-session perspective.

ConCor
Current Price: Rs 1,700.80
Target Price: Rs 1,775

The stock firmed up on extraordinary volume in Friday's session. It has reasonable support at Rs 1,685-1,690 and it has an immediate upside till the Rs 1,775 level where it will hit strong resistance. If it closes above Rs 1,775 twice in succession, it is likely to move till at least the Rs 1,870 level. Keep a stop at Rs 1,685 and go long.

ICICI Bank
Current Price: Rs 893.40
Target Price: Rs 835- 960 (Trading range)

The stock has broken every recent support on massive volume expansion. It has a projected downside till at least the Rs 830 levels on intraday basis. There was short-covering at Rs 855 and that could be an interim support. On the upside, it could lift till Rs 975 on short-covering. If you can handle extreme volatility, trade both sides with a pivot at Rs 920. Go short, with a stop at Rs 920 and cover below Rs 840. If the Rs 920 stop is broken, go long and cover above Rs 960.