Pull-back likely

MACRO TECHNICALS

The market reacted with panic on Friday to the prospect of the Left calling the shots.

After the announcement that the Left would like to halt the disinvestment programme, indices plunged. The Sensex closed at 5070 points, down 10.57 per cent on a week-to-week basis.

The Nifty was hit even harder due to its greater exposure to PSUs and closed at 1582 points for a loss of 12.31 per cent. The Defty was down 13.21 per cent as the rupee came under pressure due to political uncertainty and a possible US rate hike.

Breadth indicators were negative as one would expect. Declines outnumbered advances by several magnitudes. The BSE 500 was down 13.84 per cent. Volumes were high and it appeared that the FIIs were also net sellers. The Nifty futures continue to trade at big discounts to cash.

Outlook: After such a massive drop, there is usually a sharp pull-back since every short-term indicator indicates oversold conditions. Expect such a pull-back starting sometime this week as the market adjusts to political realignment.

There is little resistance between current levels and Sensex 5350/Nifty 1675. Even a pull-back on minimal volumes is likely to hit those upside targets. But the key question now is whether the bull market that started in April 2003 is in its death throes.

Rationale: Since January 2004, the market has dipped by nearly 20 per cent - most of it in the last week. That's more than the average correction inside an Indian bull market, though the run could stay theoretically alive even with a drop of 23 percent.

Unfortunately long-term trend reversals take a while to confirm and there isn't a definite answer yet about the long-term trend direction.

But it would be prudent to assume that the long-term trend is no longer up, until and unless there is a big rise on decent volumes. The FIIs who created the bull-run are pulling back and Indian players are very wary. Volumes would be a critical signal of renewed optimism.

Counter-view: Statistically speaking, the market has run exactly according to its pattern during every general election since 1989. It has lost around 15 per cent during the election month.

If it continues to conform to that pattern, it will gain 15-20 per cent inside the next four weeks. That would pull it back to near the all time highs logged in January.

Bulls and bears: It's easy enough to pick the bears. The listed PSUs were assaulted by a weapon of mass destruction called Sitaram Yechury.

The 'bulls' last week consisted of private sector blue chips that took less in the way of a battering. So, going forward, we can look at two possibilities for bulls.

The PSUs could see a very sharp recovery if the Left tones down the rhetoric. But they would languish at these levels or dip lower if the Marxists stick to their guns - expectations of imminent privatisation are built into the valuations. Private sector blue chips will recover quickly though less dramatically.

The high-risk trader would look at PSUs such as ONGC, Gail and Sail - all three are driven by global trends.

The more cautious would stick to Reliance, Lever, Infosys, Satyam, Bharti, Tata Teleservices, ICICI Bank, Mahindra, Cipla and Dr Reddy's. Each of these looks as though it has either hit or come close to reliable support.

MICRO TECHNICALS

ONGC
Current price: 721
Target price: 675, 825

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The stock was sold on massive volumes in the past couple of sessions. It has dipped from 840 levels to the current price within two sessions.

There is a possibility of a further downside until the 675 levels where there appears to be solid support.

If you're prepared to take a fairly large risk, enter as and when the price touches 675. There ought to be a temporary rebound until 825 level. Warning: Even among PSUs, ONGC is most sensitive to policy and there will be further huge intra-day moves.

BHARTI
Current price: 141
Target price: 161

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The stock has a potential downside till strong support around 138, and negligible resistance between the current price and 161. It is likely to see massive intra-day volatility between the range of 138-161 in the next few sessions.

Worth a buy at current prices with a stop at 135. The long-term trend still appears to be positive.

ICICI BANK
Current price: 264.7
Target price: 276, 283

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The stock has fairly reliable support between 255-265 and it appears to have landed on the high side of that range.

On a bounce, it is likely to hit meaningful resistance only around the 276 level and, if an upmove is supported by fair volumes, it could be capable of moving until 283 level. Keep a stop at 255 and go long.

M&M
Current price: 449.45
Target price: 475

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The stock has fairly solid support close to current levels and down till around 440. On a bounce, it could move rapidly till around 475 before encountering serious resistance. The long-term trend still appears to be positive. Keep a stop at 440 and go long.

RELIANCE
Current price: 477
Target price: 515, 530

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The stock has seen near-collapse on very large volumes. However it is near reliable supports and it should bottom between 465-480.

On the upside, there is little resistance between current price and the 515-530 level, where there is likely to be another massive bout of selling. If you go long, keep a stop at 465 and look for profits at around 515.

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