The Sensex plunged below 13,000 before it recovered to 13,454 points and a loss of 2.52 per cent. The Defty went down 3.6 per cent as the rupee dropped to Rs 43.21.
FIIs continued to be net sellers while domestic funds were selective net buyers. Volumes were average and the advance-declines ratio was massively negative. Other indices like the Junior, the Midcaps 50 and the BSE 500 lost 4.1 per cent, 4.1 per cent and 3.8 per cent respectively as smaller stocks underperformed.
Outlook: The market found support between 3850-3900 and it's possible that this will hold. If so, the Nifty will test resistance at 4200. The market may range-trade between 3800-4200 with high intra-day volatility despite plenty of bearish signals.
Rationale: The support at 3850-3900 held through four successive sessions. The intermediate downtrend may ease off after 9 weeks of losses.
The VIX is at a high level and that reflects anticipation of high volatility, which translated into large intra-day ranges. Although most signals are negative, the market seems oversold to a point of reversal.
Counter-view: If the support at 3850 does break, the market could dip another 200 points. Intermediate trends have been known to last up to 12 weeks so, the bear hug may continue.
We see bearishness in a low put-call ratio, a high VIX and index futures trading at big discounts to spot index values. There is massive resistance at 4200 that could terminate upswings.
Bulls & bears: Friday saw the classic pattern of a bear market recovery aided by profit booking from traders short in stock futures. Many heavyweights made 5 per cent plus pullbacks in a single session due to short-covering. Reliance Capital, RCom, DLF, JP Associates, L&T and RNRL were among this set of big bouncers.
Can the pullback be sustained by a second wave? Maybe. Stocks such as L&T and RNRL appear to remain temporarily bullish while the second wave of short-covering is underway in scrips like ABB, Ansal Infra, Aurobindo Pharma, GTL, I-Flex, Orchid Chem, ONGC and Triveni.
Banks continued to suffer as rates rose along with T-Bill yields. The Bank Nifty lost 4.3 per cent last week. The CNXIT was buoyed by rupee weakness and lost nominal amounts.
However neither sector looks attractive since the trading trend of banking and IT majors is indeterminate. Banks have started a tentative recovery while IT would be vulnerable to any rupee strengthening.
Amidst the qualified enthusiasm, note that the majority of stocks still look very bearish. Even if the major indices rise, smaller stocks are liable to continue losing ground.
MICRO TECHNICALS
Ansal Infrastructure
Current Price: Rs 86.8
Target Price: Rs 100
The stock has seen massive volume expansion accompanying the rise from a bottom at about 60. It has the potential to reach 100, and a reasonable support at 75. Keep a stop at 75 and go long. Start covering above 96.
Larsen & Toubro
Current Price: Rs 2,381
Target Price: Rs 2,600/ Rs 2,200
The stock hasn't generated volume on the recovery from a low of 2130. If it can break resistance at 2400, it has the potential to hit 2600. If the resistance is not broken, it will collapse back to around 2200 levels. Keep a stop at 2350 and go long. Increase exposure if the stock closes above 2400. If the 2350 stop is broken, go short with a target of 2200.
Orchid Chemical
Current Price: Rs 256.5
Target Price: Rs 280
The stock briefly hit the 200 mark on Wednesday so this is a spectacular comeback. It's possible to project a target of 290 although the low volume action doesn't back the rising priceline. Keep a stop at 245 and go long. Start covering above 270.
RNRL
Current Price: Rs 67.75
Target Price: Rs 80
The stock slid from around 125 in early May to a low of 54 before it saw support. This looks like an unsustainable technical recovery. But the stock has the potential to move till the 80 mark before the move peters out. Keep a stop at 62 and go long.
Tata Steel
Current Price: Rs 640
Target Price: Rs 615
Tata Steel has seen massive selling that has forced the stock down from 780 levels in the past 10 sessions. Although there's support at current levels, it doesn't seem to have bottomed and it could have a downside till 615-620. But on the next recovery, it will probably rise till 700 before it hits major selling. Keep a stop at 650 and go short, covering at 620. If the stock closes above 655, it would start a recovery.
(The target price and projected movements given above are in terms of the next five trading sessions unless otherwise stated.)
