Uptrend loses major support bases

M. S. Narasimhan

THE market moved without any direction during the week and short-term concerns seriously affected its growth.

Uncertainty over the result of US election still influences the sentiment of the market and traders and investors are turning cautious.

There is no major change or positive developments in the internal environment. The news that the Government is likely to roll-back the earlier increase in the prices of petro-products will put pressure on the economy. Any deterioration in the fiscal condition will seriously affect the foreign inflow.

Though the Government is trying to partially set right the fiscal deficit through disinvestment, it has to face several hurdles before effecting the sale. The market is right now bullish on PSU stocks on hopes of disinvestment. However, such an uptrend is difficult to sustain considering the time lag between the Government's decision and actual sale of PSU shares.

Another issue that worried the market during the week was the revision of MSCI (Morgan Stanley Capital International Emerging Market Index), which influences FIIs' investments in emerging markets. Expecting a lower weightage or removal of some of the old-economy stocks, traders have reduced their exposure in these stocks.

Though the revision of MSCI has not affected the weightage accorded to Indian stocks, which will stop further selling, it may not trigger any fresh buying. The zig-zag movement of the market will continue for some more time till the arrival of a strong positive or negative news.

The market opened with wide gap on the negative side on Monday. A steep fall in the Nasdaq on Friday affected the sentiment on opening but the market stabilised around that level. The indices recovered all their losses on Tuesday. This is again on account of sharp recovery in the US market on Monday.

Though the Nasdaq has closed with a net gain of 100 points for the week, the Sensex and BSE-100 closed with a minor loss for the week. PSU and old-economy stocks are still witnessing buying interest whereas software stocks have moved into sideways movement. HPCL, ACC, L&T, Glaxo and Tisco have reported a gain of more than 5 per cent during the week.

The stocks which suffered most during the week were Dr Reddy's Lab, MTNL and Zee Telefilms. When the Sensex is below the 4000-mark, old-economy stocks attract buying interest on account of bottom-fishing, but once the rally begins, buying interest is normally targeted at new-economy stocks.

Macro market indicators are supporting the continuation of bearish market. There is no improvement in the advance-decline (A-D) ratio of the market. The A-D ratio was around one on Friday in all groups.

Trading volumes also remained poor. Lack of interest in the market is also reflected in the badla and ALBM rates, which is around 10 per cent. The long and short positions in the BSE are also at the same level. In a major change, which will have a significant bearing on the future trend, FIIs' have turned net sellers for the week.

Further, domestic mutual funds have also increased their selling for the week. Delivery-based institutional volume is critical in setting the direction of the market.

The technical outlook of the market turned bearish during the week. Since the market failed to recover from the previous week's loss, the trend moved from the technical correction status to bearish status.

Click here for Chart

Both indices have moved below major indices which are showing a descending tops and bottoms pattern. Though the Sensex moved around the 4000-mark on Wednesday during intra-day trading session, it could not sustain the uptrend. All moving averages have also turned downwards and effectively place resistance to the uptrend.

Major resistance levels for the uptrend are 4000, 4200 and 4382. The indices are just above the 25-day short-term moving average, which is the last hope for the market to recover. Any decline from the current level will lead to a free fall of another 200 to 300 points in a short period.

The intermediate trend indicator is also showing signs of weakness. Though the MACD is on the upward path, its momentum has decreased considerably in the last two days. The market, which is moving from an oversold region to the positive side, requires considerable buying interest to sustain the uptrend.

MACD views the uptrend so far as a result of short-covering and this process ends once the MACD reaches its zero level. MACD values for Sensex and BSE-100 are -3.65 and 3.05 respectively. The intermediate uptrend will close much below its normal level in view of lack of buying in the positive zone. An intermediate downtrend at this juncture will pull down the index below 3500 level.

The short-term indicators also give a bearish view for the week. All short-term indicators are in downward path. The 5-day ROC has moved below zero level in both indices. In the normal course, the Sensex will report another 100 to 150 points loss before reaching support level. The 5-day RSI is around 50 points in the downtrend and a support comes below 30 points.

The downtrend will sustain for another two or three days with a loss of 100 points before reaching the support level. The Stochastic Oscillator has also turned bearish and is currently placed at 50 points in Sensex and 62 points in BSE-100. Before reaching the support level of 20 points, the market will suffer another 3 per cent to 5 per cent loss.

The bearish view will gain more support during the week. The recovery of the market during last Tuesday's trading was more on account of filling the gap than any real recovery of the market. Unless there is a major change in FIIs' investments, the market will continue to be bearish in the near term. All remaining long positions can be closed. Short positions can be initiated if the market opens on a bearish note on Monday with a stop loss at 4000.

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