Uptrend at critical stage

M. S. Narasimhan

THE sideways trend continues as the market is currently stuck between a narrow band of support and resistance levels.

However, volatility in specific stocks is still high as market players move from one sector to another.

At the beginning of the week, old-economy stocks were in demand, but by the end of the week, the market fancy shifted to new-economy stocks.

Even among the new-economy stocks, there was no overall spurt in demand and interest was restricted to a select few frontline stocks. There was no overall improvement in the sentiment of the market due to lack of fresh inflow of funds. FIIs, who were net buyers till last week, turned net sellers at the beginning of the week. Further, the RBI's cautionary note on the performance of the economy has restricted further investments in key sectors.

On the positive side, there were no major adverse developments in the market during the week. The removal of several restrictions on foreign direct investments will send positive signals to the overseas investors.

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The foreign exchange market has witnessed some stability and the RBI has announced that there will be no further hike in interest rates or restrictions on money market. The attention of the market will now shift to second quarter results. In a bearish phase, even a minor improvement in the performance will attract considerable buying interest.

The market opened on a positive note on Monday but failed to retain the gain. However, the downtrend was arrested at the first support level. The indices moved within a narrow band in the next two days.

The high-low spread of the Sensex was less than 50 points. Stocks belonging to cement, pharmaceuticals and hotel sectors attracted interest during this period while software stocks met with some profit-booking. On Thursday, the demand shifted back to the software sector and both the indices witnessed a smart rally.

The broad indicators of the market failed to confirm Thursday's rally as a sign of bullishness. Though the advance-decline ratio is more than one, the number of declines in all sections was quite high. There is no major change in the long-short positions of the market.

FIIs and mutual funds were net sellers during the week. Trading volume was high but was restricted to select stocks. Institutional and retail investments are essential to push the market forward and break key resistance levels.

The technical outlook of the market has not seen any major change during the week. On the positive side, the indices have witnessed a strong support from moving averages, and thus, prevented the formation of a descending bottom pattern.

The Sensex also moved above the 50 DEMA on Thursday but the break-out was not backed by strong momentum. Further, the rally was triggered by a single stock. Since a break-out at important levels require a strong force supported by some fundamental factors, it is necessary to wait for additional confirmation before initiating any fresh positions in the market.

Further, the uptrend in the Sensex was arrested exactly at the previous peak. As a result, the formation of an ascending top pattern was thwarted on Friday. There is a potential danger of the Sensex logging into a bearish double top pattern if there is no further gain on Monday. The uptrend will gather significance if the Sensex moves above the key resistance at 4576 and 4641 levels.

The BSE-100, dominated by software stocks, projects a different picture. The index was able to gather strength by consolidating its gain above the 50 DEMA. Further, an ascending tops and bottoms pattern has emerged in the BSE-100 chart. Important resistance levels for the index are at 2343 and 2378. Thus, software stocks give considerable scope for investments at current level.

The intermediate trend indicator has moved up further, and thus, gives some protection to the uptrend. In the Sensex, the MACD has moved close to the zero level and some momentum can be expected when the cross-over takes place from negative to the positive zone. The uptrend is sharper in the BSE-100 due to this cross-over during the week.

The MACD for BSE-100 has closed at 12.75 against its trigger value of -7.05. Though the indicator has entered the overbought zone, there is a scope for further rally. The Sensex can add another 400-600 points if it gets the right kind of momentum in the positive territory.

The short-term indicators project a mixed picture. While the indicators have moved into the overbought zone, they are below the resistance level. The 5-day ROC has crossed the zero level and is currently positioned at 0.41 per cent for the Sensex and 1.72% for BSE-100. There is a scope for a rally of another 100 points before Sensex reaches the short term technical correction point.

The Relative Strength Index, however, portrays a bearish short-term view. The indicator is above the resistance level of 70 points in both the indices and forewarn the onset of a short-term correction. The stochastic oscillator was placed at different levels for the two indices.

For the Sensex, the RSI indicates the possibility of the continuation of the uptrend. The oscillator has, however, reached the resistance level in BSE-100. As a result, there is a scope for a minor bearish or sideways movement in software stocks.

The market is currently at a critical stage and is positioned just below major resistance levels. Any further increase is possible only if a strong support emerges from institutional investors. And, so far, there is no such sign in this direction.

Further expansion of long positions can be deferred until the Sensex crosses the 4500-mark. Profit-booking in software stocks can also be suspended due to consolidation. There is a little scope for short positions as long as the Sensex stays above 4440 points.

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