Short-term outlook turns bearish

M. S. Narasimhan

AFTER showing a positive trend during the last two weeks, the uptrend has shown some weakness in momentum.

The uncertainty surrounding the outcome of the US election has affected the sentiment of global markets and trading in the Indian market has also turned cautious. The market received mixed notes on the economic front. On the positive side, indirect and direct tax collections have improved and exports are also showing a healthy growth.

The industrial production for the first half of the current year has confirmed the earlier fear of an economic slow down.

Though stock prices have discounted sizeable part of the negative news and the BSE Sensex has shown a decline of more than 1000 points during the last three months, fresh evidence confirming the negative news will have its own impact on the market. All major stocks in software, pharmaceuticals and banking sectors were affected in that process. The immediate outlook of the market, both fundamentally and technically, has, thus, turned bearish.

The market opened on a steady note on Monday and crossed the 4000-mark by Wednesday. After staying above this level for a day, the index moved below this psychological barrier.

The trading interest was completely absent and intra-day movement was below 100 points on all days. While the trend maintained new highs and lower bottoms initially, this bullish trend collapsed on Friday when the market opened and closed below its previous day's low. This is a clear bear signal from the market. Though the BSE-100 was able to sustain the level above the 2000-mark during the week, the index was also affected by lower bottoms and tops on Friday.

Among the Sensex stocks, eighteen have reported a loss during the week. Major losers include new-economy stocks such as Zee Telefilms and old-economy stocks such as ACC, Telco and Hindalco. Stocks from the pharmaceuticals and FMCG sectors were also affected during the week.

Since the indices are still higher than the previous week's close, it requires some more time to study whether the downtrend is a complete reversal of the earlier uptrend or a mere technical correction.

Macro market indicators have also turned bearish on account of uncertainty. The advance-decline ratio was initially on the sideways mode, but moved close to the zero level on Friday in the Group-A stocks.

Buying interest is to an extent better in Group-B1 and B2 stocks. Both the A-D indicator and volume of trading in B1 and B2 indicate this improvement. Volume of trading in Group-A stocks is on lower side showing lack of trading interest in the market. On the positive side, FIIs have remained net buyers during the week.

They have invested nearly Rs 800 crore during the week. The market further expects larger inflow of funds after the completion of presidential election in the US. The downtrend of the market was earlier arrested at 3500 when FIIs turned aggressive buyers from the third week of October and any slow down in their investment at this juncture would pull down the index back to the 3500 level. Domestic mutual funds have continued their selling though the volume is on lower scale.

The technical set-up of the market has shown a marginal change. After showing a gain of more than 300 points during the last one week, the market witnessed a correction of about 100 points on Friday. All moving averages, except the short-term moving average of 25 days, are in decline, and consequently, put downward pressure on the uptrend. Both indices have reacted on reaching 50-day moving average and this shows a sing of weakness.

In the normal circumstances, it would not be difficult to penetrate the short-term moving averages once the uptrend is in motion. Downward pressure is normally expected from long-term moving averages.

Since the uptrend has collapsed at the first stage itself, it requires more power next time to pass the hurdle. The next support level for the indices are at 3900 (Sensex) and 1967 (BSE-100). If the downtrend continues for two more days and Sensex stays below 4000, it would find it difficult to penetrate 4000 level.

The intermediate trend indicator, MACD, advanced further and moved towards the zero level. A wide gap between the MACD and its trigger during the previous week caused a minor adjustment in the prices. The uptrend of the last three weeks is mainly on account of short-covering, since the market is still in oversold region. The process of short-covering will be completed when the MACD reaches neutral level.

As it now comes close to zero level, any further uptrend depends on fresh buying interest in the market. If there is no major buying interest, the intermediate trend may close much before its normal course. In the event of continuation of the intermediate uptrend, the Sensex could easily add another 400-500 points from the current level.

The short-term indicators have turned bearish, and hence, the downtrend that set in on Friday is expected to continue. The 5-day ROC has reached zero level against the support level of 5 per cent in the negative zone.

Similarly, the RSI has already reacted above 70 level and currently placed around 50 in the downward path. The stochastic oscillator is just above its resistance level and already the downtrend has commenced.

In the short-run, the Sensex may shed another 80 to 100 points if the current trend is only a technical correction. Any decline beyond the level would trigger a fresh bearish trend.

In the absence of any clear direction, further long positions can be avoided. It is also desirable to book profits on long positions created earlier and wait for the market to take a clear trend. Long positions can be initiated above 4023.

On the other hand, if the market turns downward further, short positions can be considered below 3903. It is desirable to hold cash if the market stays between these two levels unless a new pattern emerges in the prices.

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