Intermediate downtrend to continue

MACRO TECHNICALS

Any technical bounce would run into resistance around Sensex 8350.

Two consecutive days of freefall pushed the market down sharply. The Sensex ended at 8201.73 points with a week-on-week loss of 3.41 per cent. The Nifty closed down 3.49 per cent at 2484.4 points. The Defty was off 4.92 per cent as the rupee weakened sharply against the dollar.

Breadth signals were very poor. Declines far outnumbered advances and trading volumes dipped across every market segment. The market put-call ratio rose to 0.87, which is in the oversold zone. The broad BSE 500 was off 3.68 per cent.

Outlook: The market is in an intermediate downtrend, which started about two weeks ago. Intermediate trends can last anywhere upto two or even three months although they can also terminate within a few weeks.

The market is currently at a Fibonacci support level. If that is broken, the next reliable support is at Nifty 2445 - Sensex 8050. Assuming the trend doesn't terminate immediately, that level will certainly be tested.

Rationale: All the indicators suggest that the trend will continue for a while because, while the market is oversold, it isn't desperately oversold and we can't expect a technical bounce purely on this ground. Any technical bounce, as opposed to a genuine trend reversal, would run into resistance around Sensex 8350 - Nifty 2530.

Counter-view: Every dip in the past six months has tended to provoke vast amounts of FII and domestic institutional buying. If the institutions respond in the same manner this time around, the recovery could be swift. However the institutions have been net negative through the last week.

Bulls & bears: There are no bulls worth mentioning at the moment with a strong sell off across the board. Dr Reddy's and Tata Steel appear to have bottomed out in terms of price lines and may be fairly strong defensive holdings through the next couple of weeks.

In many counters, there have been sharp price drops accompanied by huge volumes, which is unusual because sell offs generally occur on low volumes.

This high-volume-sharp drop combination is visible in ACC, Arvind, BPCL, Grasim, Gujarat Ambuja, Hindalco, ICICI, India Cements, L&T, ONGC, Ranbaxy, Reliance Energy and Siemens "� cement stocks as a group have been extremely hard-hit.

The high volume-sharp drop syndrome often leads to a selling climax when supply is exhausted and the stock starts a quick recovery.

A contrarian would be looking at these counters.

MICRO TECHNICALS

ACC
Current price: 442
Target price: 470

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The stock may have hit a selling climax because it dropped from 468 on huge volumes. If it's a classic selling climax, we will see a recovery on initially light volumes. There is support at 435 and a potential upside till 470. Keep a stop at 435 and go long.

Dr Reddy's
Current price: 905
Target price: 935

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The stock has dropped from 975 in three sessions after gaining 200 in a one-month period. On Friday, it generated extraordinary volumes in a session where it turned around from the 888 level. DRL probably has an upside till the 935 level but it will also see high volatility. Keep a stop at 890 and go long.

Larsen & Toubro
Current price: 1417
Target price: 1405, 1470

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The stock could find support at 1405 and turnaround to see a spurt back till around the 1470 levels. Go short, keep a stop at 1430. Cover the position below 1410 and start buying with a stop at 1400. Hold delivery for upto 5 sessions if necessary.

ONGC
Current price: 992
Target price: 965, 1030

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The counter has a possible downside till support at the 965 level. From there, it could turnaround and move till around the 1030 level. It may be worth going short, with a stop at 995 and cover the position around 970. As and when ONGC hits 970, it could be worth going long with a stop at 965.

Tata Steel
Current price: 379
Target price: 390

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The stock has generated enormous volumes and seen a turnaround from support at 373. It is likely to see an upside till the 390 levels before it hits resistance. The support at 373 should hold. Keep a stop at 372 and go long.

(The target price and projected movements given above are in terms of the next five trading sessions unless otherwise stated.)