A significant change in sentiments permeates markets with a bearish undertone
Sometimes one session defines an entire trend. The magnitude of the selloff on Friday would have scared many bulls into prudence. The downmove is masked in the weekly stats however - the market scarcely moved at all in weekly terms. The Sensex closed nominally up at 3358.99 points, the Nifty was down 0.85 per cent at 1080.25 points. The buoyant rupee restricted losses in the Defty to just 0.69 per cent.
Even the broad BSE 500 was down merely 0.19 per cent at 1175.71. But that single session selloff came on markedly higher volumes, the advance to decline ratio plunged deep into the red and the put-call ratio stayed in the overbought region at 0.4.
Outlook: Evidence suggests that the decline may continue in the short term. Bottoms in the 1070-1075 Nifty/Sensex 3300 regions are likely to be hit by Tuesday. If the market doesn't get support around that zone, it could fall to around 3250. Below that, there is support around 1025/3185.
Rationale: From a strictly technical point of view, we saw an engulfing pattern on Friday. The daily range was larger than on the previous days, engulfing previous prices.
Daily volume too was much higher. This pattern indicated a significant change in sentiment and the prevailing trend was definitely bearish.
The market has been up since early December. Though six weeks is on the short side for an intermediate trend, it's possible that we may successively lower prices over the next 2-3 months with Friday, January 10, being the peak of the year-end rally.
Counter-view: The long-term trend looks positive. The acid test would come if the 200 DMA is tested in this downmove. The 200 DMA is in the 3200 Sensex region. If this is breached and the market closes below that benchmark several times, then we would assume the rally was a flash in the pan. If the market stays above the 200 DMA, 2003 is going to shape up into a very good year.
Bulls and bears: The tech sector has started the year badly and has combined with negative sentiments about PSUs forcing the market down. However, a few stocks bucked the bearish trend.
Bank stocks continued to do well - Bank of Baroda, Corporation Bank, Oriental Bank and Bank of India in particular. Some pharma stocks also did well - Aurobindo Pharma, Dr Reddys Labs and Ranbaxy looked like good defensive options.
There were scattered winners like BILT, BSES, Century Textile, Greaves, Cummins, LIC Housing, Moser Baer, Siemens and Voltas. There seemed to be some defensive buying in Colgate, Nestle and Glaxo.
Software stocks got massacred. Infosys, Satyam, Wipro, NIIT, Digital and Hughes Software were all hit hard. PSUs declined, although less spectacularly. There isn't any apparent mispricing in the Nifty futures. We'll have to wait a bit before taking views in the new F&O stocks.
Near-the-money Nifty calls seemed overpriced. Selling January 1080 calls and 1090 calls could be quite profitable but premiums will probably crash on Monday.
