Short-term decline

MACRO TECHNICALS

After a brief surge, the markets plunged again. The Nifty closed at 1809.75 points after hitting an intra-day high of 1918 points on Wednesday. This was a week-on-week loss of 2.05 per cent.

The Sensex hit a corresponding high of 6030 points on Wednesday before closing at 5695.67 for a w-o-w loss of 2.08 per cent.

Breadth was very weak. Volumes were high on declines and low on advances. The ratio of advances to declines was very negative by Friday.

The broad BSE 500 was down 2.73 per cent. A saving grace was the rupee's strength - the Defty lost only 1.85 per cent. The put-call ratio was at 0.32 in the new settlement.

Outlook: The market is in intermediate decline. It is bound to test recent lows of Sensex 5567/Nifty 1756 and those supports could be broken.

The decline could continue until the levels of 5480/1700. Next week is likely to start weak since all the common trend and momentum indicators are in sell mode and we haven't reached oversold levels.

Rationale: By definition, an uptrend sees successively rising tops and a downtrend, vice versa. The criterion of falling tops was fulfiled this week when the market failed to test previous all-time highs.

An intermediate downtrend can last anywhere between three weeks and upto three months. This one started on January 16.

If we are still in a long-term bull market, the losses will be relatively less and the downtrend will be over soon. The indices will hold close to first Fibonacci retracement levels of 23 per cent corresponding to 5480/1765.

The Nifty has already breached these however and the Sensex is likely to follow suit - the Nifty is the broader and more reliable index of behaviour. The next levels could be around 31.8 per cent retracement points of 5185/1665.

Counter-view: If the market trend has turned long-term bearish, the declines will be more severe. As of now, that doesn't seem likely.

The market is finding support close to its 40-day Exponential MA, which is where it's usually landed on intermediate declines in the run-up since May 2003.

But if the long-term trend has gone bearish, prices could dip to 4575/1470 levels. This is possible since political uncertainty could last months.

Bulls and bears: In a scenario of declining prices, defensive holdings make sense for long-term investors.

Traders look for stocks that have declined more sharply than the market and hence could bounce more on recovery.

But it's early days even if it's a correction in a continuing bull market. Long-term investors should wait for lower prices to average.

Even traders should probably wait for possible bounces. We can't feature shorts except in F&O since the market mechanism makes these difficult. There are few stocks that qualify as defensive.

Aptech, Apollo Hospitals, BSES, Glaxo, HCL Tech, HCL Infosystems, Hughes Software, M&M, RIL, Tata Motors and UTI Bank seem fair defensive holdings.

Traders could seek recoveries in Amara Raja Batteries, Arvind, Ashok Leyland, Escorts, Hind Zinc, Hindalco and Gujarat Gas.

MICRO TECHNICALS

HUGHES SOFTWARE
Current price: 580
Target price: 660

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Hughes is one of the few stocks that seem bullish in the current market. It has almost completed a bullish saucer formation and the volumes have been reasonable without being heavy.

If the formation is completed with a breakout above 590, the stock could move till around the 660 mark. Keep a stop at 550 and go long with the ability to hold for upto 3 weeks.

AMARA RAJA BATTERIES
Current price: 68.25
Target price: 80

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The stock has dropped from 100 levels in late December to around 68. This is a decline far in excess of the market reaction.

It is also close to solid support and the past couple of sessions have been relatively better than the market.

On a recovery, we could expect prices in the range of 80. There is little apparent downside - keep a stop at 64. Be prepared to hold for around 12-15 sessions.

GUJARAT GAS
Current Price: 492
Target Price: 565/480

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The stock dipped from highs of 650 in early January to recent lows of 473. This corresponds almost exactly to a 61.8 per cent retracement of the upmove since May 2003.

Since 61.8 is a Fibonacci value, the downtrend could end here. We have already seen the beginning of recovery. The most interesting thing is the lack of resistance between 490-570 levels.

If you go long, the target of 565 could be achieved in 5 weeks. There could be further selling pressure before a sustained rally. Keep a stop at 472.

RIL
Current price: 560
Target price: NA

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The stock dipped out of a trading range between 550-600, finding support at around 530 levels and then moving back into that trading range.

We are likely to see a fierce tussle between bulls and bears within the limits of that broad trading range.

It appears worth a long trade at current levels with hopes of collecting profits as it approaches the top end of the range near 600.

There is secondary resistance at 580 but even on intra-day trades, buy below 562 and sell above 579 seems reasonable.

TATA MOTORS
Current price: 520
Target price: 590

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The stock has just completed a breakout from a bullish formation akin to a saucer with a spiked bottom. It moved above the critical resistance level at around 510 and it has held above that level in the recent correction.

This formation has a potential target of around 590, which seems achievable over the next 15-20 sessions. Keep a stop at 505 and go long.

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