Sign of strength at the 4000-level

M.S. Narasimhan

AFTER recording some gain at the beginning of the week, the market moved into the sideways pattern, reflecting the uncertainty about the extent and impact of the oil price hike.

The complete reaction of the market to the oil price increase will be known only on Tuesday. Since the market was expecting an increase of around 20 per cent and the current hike is around the same level, there may not be a major impact on this account.

The Government has used the occasion to narrow down the subsidies of different petroleum products. There is a fair chance that the market may react positively to the developments since the rate of hike is minimum compared to the international price increase.

With this uncertainty drawing to an end, the attention of the market will move into other issues. The second-quarter results will take centre-stage over the next couple of weeks. Here again, the market is expecting some slowdown in growth. If the actual figures are within the limits, there will be no major impact in the market.

The initial survey of the performance of different sectors point to a mixed trend. In the next phase, the market will turn stock and/or sector specific.

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The software sector, which has a sizable market capitalisation in the major indices, is expected to record a good growth rate. In a recession-affected market, the fresh funds will move towards this sector; hence, prices may up further.

Trading activity for the month of September came to an end with the Sensex recording a net decline of 13.10 per cent as against a net gain of about 4.61 per cent in the previous month. Such a trend was evident in all major markets in the world. The decline in the month of September was close to the gain recorded in August.

For instance, the Nasdaq and Dow reported a loss of 12.7 per cent and 5 per cent respectively for the month of September as against a gain of 11.7 per cent and 6.6 per cent respectively in the month of August. The market has moved into oversold territory and the bottom of the current phase is not far away.

The market opened with a gap of more than 100 points on Monday, adding another 30 points during the day. While it could not break the peak touched on Monday during the course of the week, it formed a new bottom of 4,004.73 points on Wednesday.

Several stocks touched a new yearly-low during the week though the Sensex is 200 points above its 52-week low. Many old-economy stocks sustained losses during the week. Software stocks continued their volatile trend. With quarterly results round the corner, there could be some buying interest which could result in a a new higher base for the market. But the volatility would continue on account of periodic profit booking.

Though the market posted minor gains, macro-indicators failed to support the rally. The advance-decline ratio was below one, portraying a bearish picture.

Trading volume came down significantly in both exchanges. The minor gain witnessed on Monday was also on account of short covering and the net short volume came down from Rs 274 crore to Rs 203 crore. The net long position in the market showed a minor decline.

There was no major change in investments by FIIs, who were net sellers for the month of September. On the positive side, mutual funds were net buyers for the week.

The technical set-up of the market did not witness any major change during the week. The outlook is bearish but the sideways pattern gives hope for recovery. The Sensex enjoys a strong support at the 4000-level but any break below this level will further damage the indices. The level of 4000 is also critical because of an upward trend line supporting the Sensex at this level.

On the negative side, all the moving averages have turned downward and would thus act as a strong resistance to the uptrend. If the Sensex turns up on the back of some positive news, there are several resistance levels commencing from 4,330. The next three resistance levels are at 4,407, 4,515 and 4,598. The BSE-100 faces similar resistance at 2,200, followed by 2,236, 2,307 and 2,353. Unless some positive news emerges to trigger a strong momentum, it will be difficult for the market to break multiple resistance levels.

The intermediate trend indicator moved down further into oversold territory. Though the indicator is yet to give a reversal signal, it is not far away from the reversal level.

The MACD for the Sensex is already close to the -100-level and there is chance for reversal at -150 points. The 9-day EMA is at -54.10 with the gap wide enough to trigger a reversal.

A similar position can also be seen in the BSE-100, which comprises more software stocks. Thus, if the sideways pattern continued for one more week or the Sensex suffers another 200 points, the MACD will be positioned to give a buy signal.

Short-term indicators are still bullish since the first two-day gain of the previous week was not adequate to provide a reversal signal. As the market moved into a sideways trend, all the short-term indicators are signalling a bullish signal.

The 5-day ROC offers scope for additional gain of 200 points in the short-run. The 5-day RSI depicts the possibility of the uptrend to continue during the week. Similarly, the Stochastic Oscillator is also favourable and supportive of a rally of another 200-300 points for the Sensex.

The market showed a sign of strength around the 4,000-level. While short positions can be avoided till the Sensex moves below the 4000-mark, there is no indication for initiating long position at the current level.

A limited exposure in software stocks can be considered but the position has to be liquidated if the BSE-100 moves below 2,000 points. It is better to move into cash position and wait for a clear signal.

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