If the 200 DMA at 4,650 breaks, there is cause to fear a new long-term bear market.
Prices slid through last week in a series of high volume, high volatility sessions. The Nifty hit a low of 4,766 points before making a partial recovery to 4,882.05, for a week-on-week loss of 3.05 per cent. The Sensex closed at 16,357.96 points for a loss of 2.98 per cent. The Defty lost 4.8 per cent as the rupee lost significant ground.
The bearishness intensified towards the weekend with the market crashing on Friday. The Nifty hit an intra-day low of 4,692 points before closing at 4,718.35 on February 5 for a week-on-week loss of 3.35 per cent. The Sensex was down 3.46 per cent at 15,790.93. The Defty lost 4.05 per cent as the rupee dropped. (We have ignored the token trading on Saturday with less than Rs 2,000 crore of activity.)
Domestic institutions bought in moderate quantities, while FIIs sold heavily. Every index lost ground. Breadth was poor. Volumes were low but rose on Friday when the selling pressure increased. The BSE 500 was down 3.2 per cent while the Junior lost 1.6 per cent and the Midcaps 2.35 per cent. Declines were several multiples of advances.
Outlook: The market’s likely to show a negative bias with high volatility. There could be a sharp, temporary pull-back due to short-covering. The critical support level is around 4,650. On the upside, a bounce triggered by short-covering would run into resistance above 4,830.
Rationale: The 4,650 level is where the 200 Day Moving Average (DMA) is placed. If the 200 DMA breaks, there is cause to fear a new long-term bear market. If the market closes below 4,600, it is likely to slide till 4,525. If the 4,650 support holds, there’s a chance of a rebound to levels between 4,800-4,850. A new intermediate uptrend would be suggested only by a climb above 4,950, which breaks the current pattern of lower peaks.
Counter-view: The past few weeks have seen global events driving Indian equity values. As Budget expectations mount, the focus on domestic factors increases. There’s been Rs 9,500 crore of net FII sales in 2010. That may have flushed out “hot money”. If Budget expectations are “well-managed”, the market could rebound. Traditionally, February is a month of high volatility and positive bias. Support in the 4,600-4,650 zone and a rebound above 4,950 would be very positive signals.
Bulls & bears: Every major sector was down. Banking, realty, IT and metals all lost a lot of ground. The Bank Nifty dropped 4.95 per cent while the CNXIT lost 2.6 per cent. Several key index stocks including Reliance Industries saw their respective 200 DMAs broken, which is a bad signal. Pivotals such as Infosys, Tata Steel, DLF, SBI, all look set to lose some more ground before they reverse direction. High beta scrips in these sectors like Axis, Polaris, IBRE and HDIL look almost as weak.
Any northwards trend must start either with short-covering, or buybacks from sellers against delivery. It could happen next week. The rise, as and when it comes, will be sharp and sudden. In these circumstances, experienced traders will pick the most liquid stocks, set disciplined stops and keep excess margin to cope with volatility.
Among counters that look oversold, Hind Lever, Gail, Lupin and Maruti are “possibles” for fast recovery. Sugar is another sector, which has seen a significant trend reversal. It may be hitting support. Titan and Spice have bucked the trend for specific reasons but both scrips are likely to run into profit-taking.
MICRO TECHNICALS
SHREE RENUKA SUGARS
Current Price: Rs 180.5
Target Price: Rs 200
The stock has dropped from around the Rs 245 level where it peaked in early January. It is hitting excellent support between Rs 175- Rs 180. Most likely it will range trade between Rs 175- Rs 205 in the next few sessions. Keep a stop at Rs 175 and go long. Book profits above Rs 200.
RELIANCE INDUSTRIES
Current Price: Rs 981.7
Target Price: Rs 960
The stock has hit reasonably strong support after a downside breakout below the 200 DMA. The pattern suggests that a fall till Rs 960 is probable however, especially since there’s been volume expansion on breakout. Keep a stop at Rs 990 and go short. Cover below Rs 960.
POLARIS
Current Price: Rs 155
Target Price: Rs 165
The stock has hit strong support after a steep fall from Rs 200-plus. It has the potential to bounce from here, at least temporarily. Keep a stop at Rs 152 and go long. Book profits between Rs 165-170 because Polaris will hit strong resistance around that level.
DLF
Current Price: Rs 308.7
Target Price: NA
A key support was broken on high volumes. It has some support at Rs 300, at Rs 290, and again, at Rs 275. Set a trailing stop at Rs 315 and short. Book 33 per cent profit at Rs 300 and reset the stop to Rs 305. At Rs 290, book another 33 per cent profit and reset the stop at Rs 295.
HINDALCO
Current Price: Rs 138
Target Price: Rs 128
The stock has slid 14 per cent in the past three sessions on strong volumes. There’s strong indication that the long-term trend has gone bearish. It has a minimum downside till around Rs 128. Keep a stop at Rs 142 and go short.
(The target price and projected movements given above are in terms of the next five trading sessions unless otherwise stated.)
