Triangle pattern signals free fall

M.S. Narasimhan

The sideways pattern continued without giving any clear signal during the week.

The Government's decision to reduce the prices of two highly-subsidised petro-products will affect its finances seriously. The Government is heavily depending on PSU disinvestment to meet the deficit. If the deficit target is missed in that process, it will have a series of effects on the economy and finally, affect the stock market. Right now, the market is underplaying this issue as stock prices have already come down significantly over the past few months. The issue will create a panic selling as we head towards the Budget.

The long-run performance of the market depends entirely on the economic outlook, which is showing signs of deterioration over the past few days. The rupee is under pressure despite the RBI's effort to prop up the values. Though major software companies gain on account of depreciation of the rupee, it will adversely affect many sectors of the economy.

Lower off-take in non-agricultural bank credit is yet another indication for the slow down of the economy. Reflecting the general outlook of the economy, institutional investors have considerably reduced their exposure in the market.

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Fresh investment from FIIs and domestic mutual funds have come down significantly during the week though they have not turned aggressive sellers. For the FIIs, depreciation of the rupee is another concern as it will take away some of the profits they have earned at the bourses.

The performance of individual stocks is also fluctuating in a sideways market. PSU stocks, which were in the limelight during the previous week, could not find any buyers; hence, they have topped the list of the week's major losers. New economy stocks have also failed to see any growth in view of bearish signals from Nasdaq. The Nasdaq was not just viewed as a symbol of technology stocks but a few stocks listed on the US market will influence the domestic market through their US prices.

A few old economy stocks are in the limelight, mostly on account of rumours and short covering. These stocks generally remain active when the Sensex is below 4,000 or in sideways movement. Many of these top gainers will lose momentum and top the losers' list next week.

Macro technical indicators fail to give any hope for the recovery of the market. The advance-decline ratio moves in line with the general sentiment of the market. In the absence of any divergence, there is indication for reversal of the current trend. The trading volume remained poor in both exchanges. The net short and long positions have shown marginal increase. The lack of trading interest continued in the market.

The technical outlook of the market remained bearish with all moving averages falling and indices staying below the moving averages. Indices tried to penetrate the 25-day moving average on Tuesday but failed to cross even this minimum hurdle. The Sensex will face a series of resistance in the event of uptrend starting from 3,900 to 4,360 with a gap of 100 to 150 points.

The technical condition of the BSE-100 is marginally better since its value is above the 25-day moving average. However, the index is below to all other important moving averages. The indices are also forming a triangle pattern with descending tops and ascending pattern. This `coil' pattern is difficult to assess and the market gains momentum in the direction in which it opens up at the end of the pattern. Currently, the pattern points out that the market will pick up momentum shortly in one of the two directions. Since the upward direction has many hurdles, the pattern assumes importance in the event of a downtrend. A free fall can be expected in the Sensex when it slips below 3,850 during the week. The next major support is only at 3,500.

The intermediate indicator has lost all its strength and started giving a bearish signal without moving into overbought stage. The recovery from 3,500 points to the current level is influenced more through short covering than any genuine buying.

The MACD indicator moved downward and also closed below its trigger level for the Sensex. If the intermediate downtrend picks up the momentum, it will erode 500 to 800 points in the Sensex before giving a bullish signal.

The MACD indicator in the BSE-100 is still on the uptrend giving some hope for technology stocks. Short-term indicators give some hope for temporary relief to the downtrend. The 5-day ROC has started moving upward and is currently around the zero level in both indices. If the recovery process sustains, it will add another 100 to 120 points before reaching the resistance level.

The Relative Strength Index has also recovered from the support level of 30 points and is placed at 41 and 50 points respectively for the two indices. RSI gives a scope for an uptrend for the next two to three days before the indices cross the resistance level of 70 points.

The stochastic oscillator is also in agreement with other short-term indicators for a minor recovery phase. The indicator after crossing below the support level of 20 points has recovered and crossed the support level. Nasdaq's recovery of 149 points (5.41 per cent) on Friday, after a sharp decline on earlier trading days of the week, will also give temporary relief to major markets on Monday.

Since the market is dominated more by bearish sentiment despite a minor recovery, there is no need to hurry in creating any long position. Short positions can be continued but the stop loss level continues at the 4,000 mark. Long positions can be seriously considered only when the Sensex approaches 4,160. Small investors can defer any fresh buying till the market gives a clear signal.

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