The Hindu Business Line : Sensex may see further decline

The phenomenon of negative divergence between an index and the advance-decline line caused sudden and sharp decline in the past in three out of four times.

PUNTERS forced a "technical" correction on the stock market last week. The proposed introduction of the Securities Transaction Tax from October 1 came in as a handy excuse for the speculators.

The BSE Sensex declined 0.60 per cent and the Nifty 0.64 per cent last week. This is despite a positive inflow from retail and institutional investors. (FIIs made a net investment Rs 877 crore, slightly higher than that in the previous week. MFs, however, continued to be net sellers.)

Interestingly, the broader index - the S&P CNX 500 - ended the week with a marginal gain of 0.11 per cent on a negative breadth. Going by the market history, this is an ominous sign. This phenomenon of negative divergence between an index and the advance-decline line caused sudden and sharp decline in the past in three out of four times.

A combination of factors, including shift in tactical postures by the speculators, upward movement of crude oil price globally and settlement of the September derivatives contracts, suggests that the correction may continue this week in a choppy market.

According to charts, the long and medium term positive outlook is still intact, but the short-term scenario seems vulnerable. As the big players churn their portfolio, take profit and make quick exit, amateur traders may find the week difficult.

Going by the book, these are times to use dips to enter or book profit to re-enter or churn. But the market being in the firm grip of the punters, very few retail brave-hearts would like to venture to swim upstream.

But there is a new growing breed of retail investors with a trading perspective, who react to the price spikes rather than the fundamentals, and are eager to move in. Will they be able to outwit the deep pocket operators? The operators would like to test the trading behaviour of this class of investors this week to prepare for the future trek to 6000 on the Sensex and beyond.

In case of a fall, the technical support levels for the Sensex are expected at a level of around 5400 points, followed by one at around 5310 and the next at around 5255. In case of an unlikely upward move, the Sensex has to scale roughly another 145 points and top the level around 5660 points to confirm its return on the bullish track. The benchmark, technically speaking, may see the first strong resistance in the region of 5825 points.

For the Nifty, sustenance above the level around 1750 points is crucial for a positive trend. For the S&P CNX 500, a daily close below 1460 points may technically signal the beginning of a short-term downtrend.

The oft repeated and suggested sectoral calls appear irrelevant this week. For understanding the direction of the sentiment, all eyes are likely to be on the bell-weather Reliance Industries counter. According to a set of analysts, some of the steel, pharmaceuticals and consumer durables stocks may fare well.

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