Short-term forces rescued the market

M. S. Narasimhan

THE market has recovered some of the lost ground during the week mainly on the support of old economy stocks. Since NASDAQ is not showing any sign of improvement, stocks, which were close to their 52-week low, received buying interest.

In the absence of any fresh bad news on the economy, the market witnessed a short-term buying interest on several stocks. The market was also in an oversold position during the last three weeks and profit booking by short sellers supported the recovery.

However, there seems to be no major improvement in the condition of the market except an increase in cement prices. Other stock specific reasons for the recovery surround buy backs, creeping acquisitions and take-over rumours. PSU stocks have shown significant gain after the steep fall during the previous week. In the absence of any fresh news leading to an improvement in the market, it would be difficult for the old-economy stocks, which posted substantial gain during the week, to sustain the current rally. The old-economy stocks attract considerable selling interest above the 4000-mark.

Unless software and other high-tech stocks pick up the momentum of the rally, the market will turn downward during next week.

The market opened on a strong note with a gap of 60 points on Monday on the support of a NASDAQ recovery. Though the NASDAQ crashed during the next three days on account of warning signals, its impact was restricted to only the software stocks in the country. The rally has also allowed the triangle pattern to break on the upside, but major moving averages restricted any major uptrend normally witnessed after such break-out.

Many old economy and PSU stocks have participated in the bull-run during the week. The gainers include BHEL, Castrol, ACC, Grasim, MTNL, SBI, HLL and Colgate. All these companies have posted a gain of more than 10 % during the week. Despite this large gain in many of these stocks, indices have reported a reduced growth due to a flat movement in many of the heavy-weighted index stocks. The recovery of Nasdaq on Friday should help Indian software stocks look upward.

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The macro technical indicators fail to support any major rally at this stage. The advance-decline indicator failed to move upward after Monday though the Sensex rose nearly 60 points. This divergence is the first signal for reversal of the trend. Volume of trading is showing wide variation and increased volume was also contributed by select high-volume stocks. Both long and short positions have shown sudden spurt and is indicative of more speculative activity behind the current uptrend.

The institutional activity is the only positive factor supporting the current uptrend. FII's were net buyers on Monday but they turned net sellers for the next two days. They were net buyers again on Thursday. Since the market is failing to create any new peak during the last few weeks, institutional activity assumes critical to break all the resistance levels. Stability of the rupee following a huge inflow of foreign exchange and a reduced trade deficit should encourage FIIs to enter the market again. Mutual funds have seen a large inflow during the last few months and the market also requires strong support from them to sustain the current uptrend.

The technical outlook of the market shows a mixed trend for the week. The oversold level of the market that prevailed during the previous week substantially explains the current rally. At the end of the current week, all short-term indicators have reached an over-bought level and indicate a reversal of the trend for the week. The 5-day ROC for the Sensex and BSE-100 indices are 4.23% and 4.84% against the normal resistance level of 5%.

The RSI indicator has also crossed the over bought resistance level of 70 points and placed at 72.81 and 73.78 points respectively for the two indices. The current uptrend may come to end within one or two trading sessions. The stochastic oscillator of Sensex is just below the resistance level of 80 points. The BSE-100 has already crossed 80 points.

The long-term outlook has not witnessed any improvement on account of current rally. Major moving averages are in downtrend and thus effectively restrain any major growth. Though the Sensex has penetrated the 50-DEMA, it has to cross several hurdles before showing a long-term rally of the market. Major hurdles are at 100-DEMA and 200-DEMA. The next major moving average resistance levels for the Sensex are at 4147 and 4341. The broad-based BSE-100 will face resistance at 2120 and 2221. The indices are also facing downward resistance lines in between the gap. In order to qualify for a long-term uptrend, the indices have to cross 100-DEMA at the minimum.

The intermediate trend indicator, MACD is showing a sign of improvement of the market. The indicator was showing a negative divergence last week but this was arrested on Monday. The MACD indicator of Sensex has moved upward and entered into overbought level. MACD indicator of Sensex is placed at 22.10 against its trigger level of 5.71. The intermediate trend indicator has consolidated the level in BSE-100. If the trend sustains after showing a minor loss to accommodate short-term bearish indicators, it has the potential of adding another 300 to 500 points before hitting the overbought region.

The market has recovered during the week despite a 9% loss of NASDAQ but it is too early to speculate the nature of the current uptrend. While Sensex failed to create a new peak, the BSE-100 recorded a new peak. The current trend is more of a short-term recovery in a bearish market. The indices have to break 4150 of Sensex and 2120 of BSE-100 to add strength and trigger any fresh buying. Since the Sensex has crossed the stop loss level of 4000 points on Friday, it is desirable to close all short-term positions. Software and high-tech stocks will attract interest above 4000 mark and hence it is desirable to concentrate the new economy sector, which has not participated during the current rally.

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