Strong buying interest emerges

THE market witnessed an all-round improvement during the week. This clearly signals the end of the bear phase.

While software stocks were moving on both sides during the last few weeks, major old-economy stocks were in a downtrend and had created new 52-week lows.

However, many of the old-economy stocks bounced back on the hope that there will not be a major economic downtrend. This optimism is mainly on account of increased cement sales and automobile sales during October.

Further, the second-quarter results of Reliance Industries have triggered fresh confidence in old-economy stocks. The results of companies in the banking, pharmaceuticals and hospitality sectors have shown considerable improvement.

Major gainers of the week include several old-economy stocks such as ACC, BPCL, HPCL, Telco and MTNL. The sentiment also gained additional strength on account of an uptrend in the closely watched Nasdaq index, which gained about 5 per cent during the week. This will trigger a fresh rally in software stocks in the next phase, and due to their prominence in the indices, there is a fair chance for the bullish trend to gain momentum in the near future.

The market opened on a bullish note on Monday but could not sustain the trend during the day. Though it closed below the 3700-level, it recovered quickly and posted a positive return during the next four trading days.

The indices have created ascending highs and low and consequently confirmed a bullish pattern. The Sensex was unable to cross the psychological barrier of the 4000-mark despite a strong rally in many Sensex stocks. Nevertheless, the BSE-100 was able to close above the 2000-mark on Friday. The indices have also created ascending tops and bottom for the first time in the downtrend. Thus, a steady but strong rally is expected during the next few months.

Major macro indicators support the continuation of bullish trend. The advance-decline ratio is in the positive territory in all the groups and it shows a high value for Group-A shares, where activity is high.

On Friday, the number of advances was 113 against the number of declines of 26. Among the Sensex stocks, 24 have reported gains during the week.

FIIs remained net buyers for the week though they were sellers on some days. Investments from mutual funds have declined, but will pick up once the market turns bullish. Though short-sales in the market are still high, the uptrend and presence of institutional investors will force short-covering, which in turn will give momentum to the market.

Among the market indictors, the volume of trading alone gives a caution on the current rally. There is no significant improvement in the volume of trading, which casts some doubt on the strength of the uptrend.

The technical outlook of the market improved further during the week. The short-term moving averages have started looking upward, and thus, add strength to the rally. The Sensex and BSE-100 have penetrated 25-DEMA and are close to 50-DEMA. Though a minor resistance is expected at 50-DEMA, the underlying strength is adequate to penetrate this level.

However, the indices will face a major challenge when it moves towards 100-DEMA. Another major resistance at 4250 is a strong downward trend line. While the market is expected to witness a minor correction before moving towards this level, there is a need for another set of strong news to drive the prices to a new high and penetrate multiple resistance levels. The trend will gather considerable strength above the 100 DEMA (4250).

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The last resistance level for the two indices are 4430 and 2264, and above this level, there will be a free rally. Though the technical outlook for old-economy stocks has considerably improved, the scope for appreciation is much larger in major software stocks. There is a clear buy signal for many of the software majors and their resistance levels are also at much higher levels.

The intermediate trend is getting much stronger as the Sensex has reported a gain of about 500 points in the last three weeks. The MACD indicator has moved further upward and currently positioned at -78.51 points in the Sensex. It is also much above its 9-day EMA trigger, and thus, protects the intermediate uptrend.

The wide gap between the two lines also suggests a minor correction in the upward direction. The intermediate trend is much stronger in BSE-100, which represents more new-economy stocks. During this intermediate rally, the Sensex has a scope for an additional 500-800 points.

The short-term outlook is not encouraging since the Sensex has recorded more than 200 points without a major correction. The 5-day ROC has moved above its 5 per cent resistance level, and thus, a minor correction in prices is expected.

The Relative Strength Index has also crossed its resistance level of 70 and currently placed around 80 points in both indices. The stochastic oscillator is close to 100 points, much above the resistance level of 80 points. All short-term indicators are pointing to the fact that the market is overbought in the short-term and a correction is expected. The correction may be a marginal decline or sideways movement.

The market has consolidated its gains and moved into positive territory. Long positions can be continued and expanded further once the Sensex crosses the 50 DEMA at 4033. Profit-booking in long positions is desirable around the 4200-mark if there is any sharp uptrend in the near future. Short-selling has to be avoided and short-term corrections can be used to cover the short positions.

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