Trading activity likely to perk up

M.S.Narasimhan

AFTER a sharp fall during the last three weeks, the market stabilised in the previous settlemet. However, trading and investment interests have gone down significantly in the absence of any fresh flow of news.

The volume of trading has declined sharply at the BSE. All major companies have declared their half-yearly results. Though the market was preparing for the worst case scenario, the results were better than expectations.

However, there is no clear picture on the future performance of the economy due to contradictory signals. While industry associations and RBI have projected marginal decline in the growth rate, Finance Ministry is still bullish about the economic growth. In an uncertain period, the level of risk taking has come down significantly. This has resulted in a sideway movement in the over stock prices.

While Sensex stabilised around 3700 level, BSE-100 showed an improvement over the previous level. The market is slowly recognising the strength and potential of the software sector. This is reflcted in the recovery in share price of software stocks during the week.

The level of investment and trading activity is expected to pick up and the prices of software stocks could move up sharply during the next phase. The old-economy stocks would probably have to wait for one more quarter before a clear trend emerges on the finnancial performance front.

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The market opened on a stable note on Monday at 3700 points but declined sharply during the day towards 3600 level. For the second time, the Sensex got support below 3600 points on Tuesday. The trend remained positive during the next three days and end of settlement pressure pulled down the Sensex on Friday. BSE-100 was able to post a marginal gain of Friday. While Sensex failed to give a clear picture, the BSE-100 is showing a sing of revival by forming ascending bottoms pattern. The formation of ascending tops pattern in the near term would imply that a new bullish trend is underway.

The broad market indicators are showing a mixed trend for the current week. Volume of trading has gone down considerably and thus fails to confirm the trend. Any uptrend or downtrend requires increase in volume to justify the trend. Advance-decline ratio is close to one, but on many days, there was a divergence between the AD indicator and price level. This again suggests a lack of confidence on the current movement of the market.

FIIs and financials institutions were net buyers during the week. This was the only major positive highlight of the week's trading. While FIIs have invested more than Rs 600 crore during the last few days, domestic institutions volume was around Rs 200 crore. While this level of investment has arrested any further selling, the positive investments need to continue to sustain the level and move upward.

There is a marginal improvement in the technical outlook of the market during the week. Price movements during the week suggest no major selling at lower price in the near future. Thus, the chances of Sensex moving below 3500 level, where the Sensex has created a new bottom last week, is less. At the same time, the bulls have to struggle hard to pull the market from the current crisis in view of strong overhead resistance.

The first resistance level for the Sensex is at 3895. If the market crosses this level, the index will form a short-term support base at 4000 level. Above 4000, the Sensex faces resistance from the moving averages at 4084, 4293 and 4463. For the continuation of an uptrend, the Sensex has to cross the second resistance level of 4084. Since the task of crossing multiple levels within a short interval is a difficult task, it will take time to clear the hurdle.

The software sector shows considerable strength in an otherwise bearish market. Ascending bottom and fresh flow of investments will allow the software stocks go add values in a short period of time.

The intermediate indicator is also confirming that the bottom of the market has already been reached. MACD, after a long time, has started moving upward in the oversold region and moved above its trigger value. MACD values of the two indices are -142.34 and-67.08 respectively with their triggers below this level. Though the movement in MACD gives a clear signal of intermediate uptrend of the market, it is desirable to wait for right momentum in the prices before entering into long position. If the intermediate trend picks up, the Sensex will add another 500 to 800 points over the next three months.

The short-term indicators are giving a mixed trend in the side-way market. Price ROC, after touching the normal resistance of 5% in both indices, have come down and are positioned close to zero level. This indicator points out that the market could decline further and reach support level when the Sensex sheds another 150 points. The RSI indicator is yet to complete the cycle and thus offers a further scope of uptrend in first half of the next week. There is a scope for price reaction towards the end of the week when the RSI crosses its resistance level of 70 points. Stochastic Oscillator is close to bearish level and is indicative of a short term downtrend in the market.

The market has come out of the bear grip and is presently consolidating its position. Sideways pattern assumes critical because the next phase depends on markets' fresh assessment about the future. Short selling has to be avoided during the consolidation phase. Short selling can be considered if the Sensex slips below the 3700-mark. Long positions can be continued and expanded in select software stocks provided the Sensex is above the 3700-level. Small investors can enter into the market through mutual funds route and acquire healthy portfolios at lower levels.

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