Panic selling arrested

M.S. Narasimhan

MARKET sentiment improved marginally towards the end of the week.

This is partially on account of stability in the international market and the absence of any major negative news in the domestic market. Though signs of slowdown in the growth rate are visible in the second quarter results, they were, nevertheless, along expected lines.

With the performance of the new-economy stocks showing considerable improvement, a large buying interest was witnessed at lower levels in these stocks. Since all heavy-weighted index stocks are quoting at a new yearly low, fresh short selling will be much lower.

On the other hand, there will be panic short covering and profit booking if the prices display a firm trend. Institutional selling has come down significantly, which will arrest fresh delivery-based selling in the market. Stability in the foreign exchange market supports partial recovery in the equity market. The successful launch of Wipro's ADR in the US market and the fact that the stock is trading at a premium are favourable developments for the domestic market sentiment.

The US market recovered considerably since last Tuesday and hence, will arrest panic follow-up selling in the domestic market. Thus, the near-term outlook of the market has improved marginally. Further progress in an upward direction depends on the market's ability to break major resistance levels.

The Sensex opened with a major gap of 170 points on Monday following an overnight gain of about eight per cent at the Nasdaq. After a marginal rise thereafter, the uptrend collapsed. The Sensex closed with a net loss of 10 points. However, the technology-weighted BSE-100 closed with a net gain of 12 points on Monday.

While the market was in the bearish phase over the next two days, it recovered sharply on Thursday after forming a panic bottom below 3,500 points. On Friday, the market opened again with a gap of 100 points but lost all the gains intra-day. The BSE-100, however, sustained partial gains. Frequent gaps and divergence between the two indices show that the market is in a confused phase and looking for strong support to stabilise at a higher level. Unless that takes place over the next two or three days, the market will resume its search for a new bottom.

There is marginal improvement in the macro-market indicators. The advance-decline ratio displayed a divergence on Friday. The number of advancing issue was higher than declines despite the Sensex's weak close. While FIIs have tempered their selling, domestic institutions turned net buyers during the week. The volume of trading improved during the last two days when the market moved up. There is no fresh negative signal from the long and short volume.

After creating a panic new bottom below the 3,500-level, the Sensex recovered nearly 200 points on Thursday. The recovery resulted in a minor change in the market's technical outlook. The sharp uptrend is also on account of the wide gap between the moving averages and price line. At the 3,500-level, the gap between the Sensex and 200 DEMA was about 1,000 points. Such a large gap warranted a technical correction.

Despite a 200-point recovery from the new bottom, the gap is still wide, offering sufficient scope for another 150-200-point recovery for the Sensex. As it moves closer to 4,000 points, the uptrend will witness considerable pressure. For sustaining the uptrend, the Sensex has to move past 4,000 points with ease and considerable force.

Click here for Chart

Long positions can be considered only when the Sensex crosses the 4,000-level. Above this level, it faces resistance at 4,168, 4,356 and 4,500. Though the BSE-100 also displayed a similar picture, on Friday, it was able to close above the previous day's close and open; high and low values were also above the previous day's value.

The intermediate trend indicator has shown a minor improvement. Till Wednesday, the MACD was moving down but the downtrend was arrested on Thursday. It moved sideways in the last two days but a reversal requires further confirmation. The MACD has to move above its moving average to trigger an intermediate uptrend.

The MACD value for the Sensex is placed at -174.16 as against its trigger level of -151.32. The Sensex has to move up by at least 300 points to give a clear signal of an intermediate uptrend. In the event of an intermediate uptrend, there is a fair chance for the Sensex to clear multiple moving average hurdles.

The onset of an intermediate uptrend is relatively easier in the BSE-100 as the gap between the MACD and its trigger is just 8 points.

All short-term indicators have turned bullish at the end of the week despite a 100-point decline from the day's peak on Friday. The 5-day ROC in the Sensex is on an uptrend after hitting -8 per cent and has the potential to add another 200 points.

The Relative Strength Index (RSI) has just crossed the support level and can sustain the uptrend for the next few days. The Stochastic Oscillator also turned bullish and penetrated its trigger. Since all short-term indicators are showing bullish signal, the downward pressure will be absent at least for the next few days.

The market has recovered from a critical stage after paying a heavy price. The period of uncertainty seems to be over and all markets are showing signs of improvement. However, it is too early to judge whether it is a genuine uptrend or just a technical correction to the downtrend. Short selling can therefore be avoided till short-term indicators show a reversal. Limited long positions can be initiated to exploit short-term opportunity and move with the market.

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