Bearish signals

MACRO TECHNICALS

After executing a partial recovery after the Black Monday collapse, the market fell again last Friday as Dalal Street emphatically rejected the Common Minimum Programme (CMP).

The Sensex closed at 4835.39 points for a week-on-week loss of 2.54 per cent. The Nifty closed at 1508.75 for a loss of 3.29 per cent. The Defty lost 3.49 per cent as the rupee lost further ground against the dollar.

Breadth signals were negative. Declining shares far outnumbered advancing shares. Volumes were low through the week and spiked on Friday as the market plunged.

The broad BSE 500 lost 3.56 per cent in a clear signal that smaller shares are suffering quite as much as pivotals. The Nifty put-call ratio was in neutral territory but the new settlement has just kicked in so this signal may be distorted. There is large-scale backwardation across the stock futures market.

Outlook: The market is within 2 per cent of testing its last reliable supports. If it closes below Sensex 4775/Nifty 1475, the next stop down may be the Black Monday levels of Sensex 4250/Nifty 1375.

However, if support holds at Nifty 1475 or slightly above, we will see a quick recovery till Sensex 5150/Nifty 1620 levels. The signals seem bearish but may be not enough to force values down that critical 2 per cent.

A leading indicator like the 10-day RoC seems to suggest that the market is capable of turning around inside two sessions. The long-term trend is tough to read and an interpretation of this is critical after the turmoil of the last six weeks.

The long-term trend could be poised to recover sharply. The market moved from 920 Nifty levels in April 2003 to an all time high of 2014 in January 2004 - that is, a gain of 118 per cent in nine months.

This was the shortest, yet broadest bull market in Indian history. The Nifty dipped to a low of 1292 on Black Monday - a retracement of 36 per cent from the peak and a retracement of 66 per cent in terms of the upmove inside just 4 months. January-May could have been the shortest bear market in Indian history.

Counter-view: It's possible that the period of decline has been too short even if the quantum of decline has been substantial.

In that case, the long-term trend could stay down for an indeterminate period, and prices will dip below 1290 Nifty before sustainable recovery. Most bear markets do last longer than a year and most Indian bear markets see greater losses.

For example, the 1993 bear market and the 2000-2003 bear market both knocked 57 per cent off peak values. If this pessimists' view is correct, the bottom could come well below Black Monday's lows.

Bull and bears: Very few shares moved against the trend in the last week. These included East India Hotels, ITC, Max, Nicholas Piramal, Thermax, L&T and Corporation Bank.

There is selective investment flowing into defensive stocks such as big pharma companies like Dr Reddy's and Ranbaxy which would lose less than the market if the trend remains bad.

Bajaj, Mahindra and Tata Motors could also prove to have defensive strength. Stocks across the rest of the market would probably act in tandem with the overall trend with PSUs and PSU banks being hit hard and power sector utilities and equipment suppliers also being sold on Friday after the provisions of the CMP with its review of the Electricity Act, 2003, were announced.

MICRO TECHNICALS

THERMAX
Current price: 398
Target price: 420

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The stock has gradually risen despite the poor market conditions. It should have a target of around 420 in the short-term.

The negative factor is the generally low volumes which suggest that this uptrend may not be sustainable. Keep a stop at 390.

CORPORATION BANK
Current price: 282.85
Target price: 288, 310

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The stock has held its value against a falling market. There is strong resistance just above the current price at around 288. There is support at around 277 and slightly lower at 270.

If the stock closes above 288, it could move till around 310 without much resistance in-between. Keep a stop at 277 and go long or alternatively wait until 288 is crossed before taking a position with a stop at 282.

EAST INDIA HOTELS
Current price: 256
Target price: 260, 272

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The stock is consolidating in a range between 245-260. It has shown signs of real strength by moving up slightly to test the upper end of this range even as the market fell.

Accumulate the stock for the long term or wait for a close above 260 and then go long. If the 260 is crossed, the stock would hit a level 272 before running into the next resistance.

ITC
Current price: 883
Target price: 900

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The stock has consolidated into a symmetrical triangle formation while the market fell. Triangles are generally continuation formations, especially if there isn't a breakout before the last third is completed.

This formation is almost complete, suggesting that the stock will either continue to trade sideways close to current prices between 880-900, or perhaps rise till around 935-950 levels.

It seems a good defensive buy since it appears to be moving independently of the market.

MAX
Current price: 182
Target price: NA

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The stock has risen on fair volumes even as the market fell. It completed a very bullish formation when it closed above 175. The upside target is now around 225 and this should be reached over the next 2-4 months.

There will be resistance in the 195 zone. Go long with a stop at 175 and consider booking partial profits as and when the stock is over 195.

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