Uptrend clears final hurdle

M. S. Narasimhan

THE uptrend continued on the strength of PSU and other old economy stocks and crossed the critical level with good volume.

In this process, the market consolidated the gains accrued since 4000 level but yet to show enough strength for a new bullish phase. After crossing the hurdle level set at 4265 on Monday, the market has turned into sideway mode and has added another 60 points in the remaining three days.

It also failed to clear the previous peak with any major force. While the investment by FIIs was high during the last three weeks, the rate of inflow declined during the week. Domestic institutions have surprisingly turned aggressive sellers during the week. In this process, all index heavy weighted stocks, which contributed to the uptrend, have remained subdued.

On the other hand, industry-specific factors have pushed up the side counters. On the strength of disinvestment news, the PSU stocks attracted market interest while cement companies ruled firm on the back of better quarterly performance. It is however difficult to sustain the uptrend caused by speculative buying since an equal selling pressure will emerge once the results of these firms are announced.

There is no major improvement in the macro economic condition of the market. After a brief period of stability, the Rupee has started depreciating. This will be a major concern for FIIs as it causes immediate loss to their positions. It will also slow down their fresh investments as well. Higher inflation rate coupled with high interest will affect the growth rate of the industry. The report that growth rate of core sector was severely affected during the year is not a good news for the market particularly for those who are investing in old economy stocks.

The market is presently moving upward on the expectation that the budget will be growth-oriented and stock market friendly. While this type of pre-Budget hype is not unusual, the market loses more during post-Budget period if the Budget fails to meet some of these expectations.

The market opened on a strong note with a gap of 53 points but moved at a slow pace for the rest of the days. Major gainers include Zee Tele, MTNL, BSES and HPCL. While software sector moved into a sideway pattern, pharmaceutical sector suffered during the week. The macro indicator of the market is also indicating a mixed trend for the future.

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The advance-decline ratio fails to give a clear support for the uptrend as it turned negative on two days during the week. The trading volume has also declined from Monday's level. More importantly, FII volume has shrunk and domestic mutual funds were net sellers. FIIs have turned net seller around the same level in December when the Sensex moved upward from 3800 to 4300. Overseas market development was also not very positive with Nasdaq losing the gain recorded in the first two days.

Though the life of the uptrend is still not clear, the technical set up of the market has seen some improvement over the previous week. The indices have penetrated the 200 DEMA on Monday when the Sensex reported a net gain of 73 points. This upmove, provided the first signal for the long-term reversal of the trend. The long-term moving averages have also turned upward and thus lend support to the uptrend during technical correction.

On the positive side, the trend has supports at 4267, 4130 and 4090. At the same time, the Sensex needs to clear the previous peak of 4336 with a good volume and force to get further strength for the uptrend. If it fails to close above this level, there is a danger of formation of bearish double top pattern. The indices should at least move sideways to give a bullish flag pattern. Above this level, the Sensex has no resistance until reaches the 4800 mark.

The intermediate trend has also turned bullish though it was showing some weakness earlier. The MACD indicator has come out of zig-zag pattern and shows a clear uptrend. The 9-day EMA also stayed below the MACD and lends support to the intermediate trend. Though the MACD indicator is moving on a bullish note, it should be noted that it is already in the overbought zone and selling pressure will emerge slowly as it moves further forward. Further, the life of the current intermediate trend is half of its full life since earlier reversal took pace immediately after moving below zero. The intermediate uptrend will likely to witness resistance after showing another 200 to 300 points gain.

The short-term indicators continue to show bearish trend and all indicators have moved above their resistance level. The 5-day ROC is above 5% resistance level in the Sensex and close to 5 per cent for BSE-100. A technical correction at this stage is expected to cost around 200 points. The 5-day RSI has also moved close to its extreme value and placed at 90 points in Sensex against the normal resistance of 70 points.

The market is ripe for a short-term reversal or sideways pattern according to RSI indicator. The Stochastic Oscillator has also moved about its resistance level of 80 points and closed at 93 points in both indices. This indicator also signals that the Sensex should lose some weight in the short-run.

The market has maintained its uptrend despite a slowdown in FII buying and heavy mutual funds selling. The attention of the market has moved from new economy to old economy stocks. Technically, the market has entered into bullish phase and cleared the hurdle at 4265. The long position can be further expanded if the Sensex moves above 4340. It is also desirable to book profit partially when the Sensex moves closer to 4800 mark.

The long positions require a review if the Sensex moves below 4270 and also if FIIs investments turns negative. The market may also witness some short-term pressure in view of earthquake in Western part of the country, which dominates financial market of the country. Scope for short position exists only when the Sensex moves below 4130.

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