Uptrend stopped at critical level

M. S. Narasimhan

THE market has slowly recovered from the previous week's shock following the arrest of a film financier and started looking into the fundamentals of the market.

There seems to be little in the new-economy stocks since the market appears to have already discounted all bad news. Since most of the firms, which have announced the third quarter results, especially those belonging to the new-economy sector, have exceeded the expectations of the market, there is a sudden rush towards these stocks.

Though the prospects for the software sector looks bright, it is not the case for all other sectors. The economy is not too strong and sign of weakness is already visible in a few areas. The inflation rate has moved upward and settled above 8 per cent level. The pressure from oil price on the fiscal deficit is expected to continue in view of the decision by oil producing countries to cut down the production. The Government's inability to bring down the subsidy would also compound the problem.

It is another year of failure on PSU disinvestment, which has a bearing on Government finance. Though the Finance Ministry is yet to give any signal on the Budget, there are more constrains than comforts to the Government. The market is however running high on Budget expectation and any disappointment would cause major erosion during post-Budget period.

While software and other new-economy stocks will recover a part of their post-March loss during this phase, the future of other sectors is not very bright at this juncture. The market opened on a steady note on Monday but turned sideways for the next three days. The software and media stocks turned bullish following a steady uptrend at the Nasdaq on Wednesday and Thursday.

Bears, who went short earlier, were forced to cover their position in view of uptrend in the overseas market. Major gainers of the week are L&T, Infosys, Satyam, HPCL and Gujarat Ambuja Cements. Some of these old-economy stocks have gained in the beginning of the week but failed to sustain the trend. Telecom stocks are facing losses following high level of competition leading to price cuts. It was also a dull week for FMCG and pharmaceutical stocks.

Macro-technical indicators give a mixed trend. Advance-decline ratio has moved in line with the market but fails to show any major upward movement on Friday when the indices reported a sharp gain. Volume of trading has seen marginal improvement and select stocks dominated the market volume on Friday. The positive factor however is the continued buying by FIIs and domestic funds. Since institutional investors entered the market below 4000-mark, a partial booking of profit is not ruled out when the Sensex moves forward.

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The technical set-up of the market has shown some changes but a clear buy signal is still not evident. The indices have moved above the two moving averages located at close intervals. It is now critical for the Sensex to move past the 200 DEMA placed at 4265. Though the gap between 200 DEMA and BSE-100 is narrow, it is essential for the index to clear the resistance to give a bullish signal. Several times earlier, the indices have lost their control at this stage or immediately after crossing this level. The indices are also facing another strong resistance from downward trendlines, which have arrested the uptrend earlier. After a month, the market is again at a critical stage and it is to be seen whether Friday's force will push the market into a bullish orbit.

The intermediate indicator, MACD, fails to give any clear picture on account of zig-zag pattern. After showing a downtrend last week, it again moved upward and penetrated its trigger line. MACD values for the two indices are 21.01 and 10.19 respectively. MACD of both indices have crossed their trigger level on Friday. Since the intermediate trend has not completed its full cycle, it is difficult to conclude that a major uptrend is underway at the current stage.

The short-term indicators are showing extremely bearish condition for the market since all the three indicators have passed their respective resistance levels. The 5-day ROC of the two indices are placed at 3.91% and 5.30% against the resistance level of 5% . Though there is a scope for a marginal gain in the Sensex, the market is clearly at overbought level. Any further increase will add pressure to the market and it will get reflected during the downtrend.

The RSI indicator for both indices is above the resistance level of 70 and a short term bearish trend may set in any time. The Stochastic Oscillator is also moved above its resistance level of 80 points and ready to give a short-term correction.

The market is discounting the positive news of the previous week and also influenced by the uptrend witnessed in the Nasdaq. Since many old-economy stocks are expected to announce their third-quarter results, which is not likely to be as good as results of software sector, the market is not completely out of difficult days. While the current set up demands a long position as the market has moved past the 100 DEMA on Friday, it is desirable to wait for indices to clear their respective 200 DEMA for further expansion of long positions.

There is no scope for short position until the Sensex moves below 4110. Small investors can avoid the market until the indices enter into long-term trend by clearing their 200-day moving averages.

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