Onset of uptrend likely

M. S. Narasimhan

AFTER a sharp fall in recent weeks, the market stabilised in the previous settlement.

However, trading and investment interests went down significantly in the absence of any fresh news. Trading volume also declined sharply at the BSE. With all major companies declaring their half-yearly results, the market was preparing for the worst case scenario. However, they turned out better than expected.

Still, there is no clear picture on the economy's future performance on account of contradictory signals. While industry associations and the RBI have projected a marginal decline in the growth rate, the Finance Ministry is still bullish on economic growth. In an uncertain period, the level of risk taking came down significantly, causing sideways movement in the prices.

While the Sensex stabilised around the 3,700-level, the BSE-100 saw an improvement over the previous week's level. The market seemed to slowly recognise the strength of the software sector and the prices of stocks from the sector recovered during the week. The level of activity will pick up soon and the prices of software stocks may move up sharply during the next phase. All old-economy stocks are likely to lag behind.

The market opened on a stable note on Monday at 3,700 points but declined sharply during the day. For the second time, the Sensex got support below 3,600 points on Tuesday. The trend remained positive over the next three days. While the Sensex closed on a marginally weak note, the BSE-100 posted gains on Friday.

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The price pattern in the Sensex failed to give a clear picture, while the ascending-bottoms pattern in the BSE-100 showed signs of revival. The bullish trend requires one more condition, namely ascending tops. A clear picture will emerge over the next two weeks.

The broad market indicators are showing a mixed trend for the current week. The volume of trading has gone down considerably, thus failing to confirm any sort of trend. An up or downtrend requires an increase in volume to justify it.

The advance-decline ratio is close to one but on many days there was a divergence been the AD indicator and price level. This again suggests a lack of confidence on the current market movement.

However, both FIIs and domestic institutions were net buyers during the week. While FIIs invested more than Rs 600 crore during the last few days, the volume of domestic institutions was around Rs 200 crore. While this level of investment has arrested further selling, positive investments need to continue to sustain the level and move up further.

There is marginal improvement in the technical outlook of the market. Price movements during the week suggest no major selling at lower levels. Thus, the chances of the Sensex moving below the 3,500-level, where the index has created a new bottom last week, is less. At the same time, the bulls have to struggle to pull the market from the current crisis in view of strong resistance above the current level.

The first resistance for the Sensex is at 3,895. A move past this level would help it form a short-term base at 4,000. Above 4,000, the Sensex faces multiple resistance from downtrending moving averages at 4,084, 4,293 and 4,463. To trigger an uptrend, the Sensex has to cross the second resistance level at 4,084.

Since crossing multiple levels within a short interval is a difficult task, it would take some time for the market to clear the hurdle.

The software sector shows considerable strength in an otherwise bearish market. Ascending bottom pattern and fresh flow of investments would allow the stocks add values in a short period.

The intermediate indicator is also confirming that the market has already reached its bottom. MACD after a long time has started moving upward in the oversold region and above its trigger value. MACD values of the two indices are -142.34 and -67.08 respectively with triggers below this level.

Though the movement in MACD clearly signals an intermediate uptrend in the market, it is desirable to wait for the right momentum in the prices before entering into long position. If the intermediate trend picks up, the Sensex would add another 500 to 800 points over the next three months.

The short-term indicators are giving a mixed trend in view of sideways movement. Price ROC, after touching the normal resistance of 5 per cent in both indices, has come down and is close to the zero level. This indicator points out that the market could decline further and reach support level when the Sensex sheds another 150 points.

The RSI indicator is yet to complete the cycle and thus, offers further scope of uptrend in the first half of the next week. There is scope for price reaction towards the end of the week when the RSI crosses its resistance level of 70 points. The Stochastic Oscillator is close to the bearish level and supports a reaction in the market.

The market has come out of the bear grip and is currently consolidating its position. The sideways pattern assumes critical as the next phase depends on the markets' fresh assessment of the future. Short selling has to be avoided during the consolidation phase. However, it may be considered if the Sensex slips below the 3,700-mark.

Long positions can be continued and expanded in select software stocks provided the Sensex is above the 3,700-level. Small investors can enter the market through the mutual funds route and acquire healthy portfolios at lower levels.

(The author is Associate Professor at the Indian Institute of Management, Bangalore.)