The Hindu Business Line : Query Corner

Please clarify my apprehensions. Somewhere in August an impression was created that correction is on the cards anytime now and in September, every correction was followed by consolidation and retail investors took the things into stride easily. Finally the correction dawned on October 5, which appears to have taken everybody by surprise. And your article published last week states that this was a likely move as per the Elliott Wave Theory. On the other hand, the article of Milind Karandikar, a mathematician in an interview to a financial daily recently had ruled out such a massive correction albeit talking on the same theory. Now what according to Elliott Wave Theory will be the course of the market in near term? — Lalit Sabharwal

It is a pertinent question that you have asked pertaining to Elliott Wave analysis. We would like to highlight a few peculiar aspects relating to Elliott Wave theory before taking up your question.

One of the common criticisms against the Elliott Wave theory is that its practitioners tend to have diverse views.

At any point in time, it would be too difficult to accept or negate a particular view of an Elliottician as only the passage of time would determine or provide clues about the validity of a particular opinion.

Besides, the Elliott Wave theory is such that there are bound to be instances where a practitioner may have two or more preferred views that may be contrary to each other.

As the price action unfolds, the choice of a preferred view gets more obvious as others get eliminated.

We would also like to highlight that we have been calling for a correction that is a proportion both in time and value to the earlier rally. The point is, this expected correction has been delayed.

And, we have also consistently maintained a positive long-term outlook for India markets and continue to hold that view.

In this context, investors must also realize the importance of money management strategies to minimise losses and maximise returns. Adherence to strict stop-loss levels and taking profits regularly would have saved investors from the impact of recent carnage.

The important aspect that needs to be highlighted is that the recent fall has not even met the minimum 38.2 per cent Fibonacci retracement target of the rally.

In this context, the fall does not appear too appalling though investors who have been used to three-digit gains in the Sensex may find this fall a bit difficult to stomach.

Coming to your confusion relating to Mr Milind Karandikar's view of a rally to 18000-40000 and our view of a sharp correction (published last week), we would like to highlight that you are comparing two views which are basically not comparable.

We have called for a deep correction to the recent rally while Mr Karandikar has not elaborated on this aspect. He has just observed that there could be intermediate corrections.

Moreover, we wish to highlight that both of us are basically bullish from a long-term perspective. Business Line has maintained the long-term bullish stance over the last couple of years and have reiterated it even last week.

Mr Karandikar has mentioned a target of 18000-40000 in the next five years. Business Line does not believe in projecting targets for a five-year time frame or beyond.

We are basically positive on the long-term outlook and we believe in looking at medium-term targets and take it forward as the time goes on.

Given this backdrop, we do not see any major inconsistency between our view and that expressed by this gentleman.

Taking up your other question, we believe that Sensex has commenced an "impulsive pattern" from the low of 4227 recorded in May 2004. As it is the case with any "impulsive move", this rally should also subdivide into five alternating segments in accordance with the Elliott Wave Theory.

The first upward move or Wave 1 ended at 6696.31, which was followed by "Wave 2" correction that ended at 6118.42. Wave 2 took the shape of a classic "expanded flat" pattern described in the Elliott Wave theory.

The next move up, which is Wave 3, commenced at 6118.42. It remains to be seen whether Wave 3 has been completed at the recent high of 8821 or only a portion of this move has been completed at this high.

The implication would be extremely bullish if one were to assume that only the first segment or Wave 1 of Wave 3 has been completed at the recent high.

This would mean that Wave 3 is also subdividing into five segments and we could see the entire sequence of "Wave 3" taking us to dizzy levels.

On the other hand, if you prefer a more conservative analysis, we may presume that Wave 3 has been completed at the recent high of 8821 and the subsequent fall would be categorized as Wave 4.

On the completion of the fourth Wave, we can expect Wave 5 to at least touch the earlier peak of 8821 or move beyond it as well.

Whichever way you look at it, there is at least one more upward move that is warranted to complete the sequence of five waves that commenced at 4227.

We would prefer to keep both options open and wait for market to give us an indication about the validity of a particular view.

I have exposure to Sona Koyo Steering at Rs 76 and IDBI at Rs 119. What is the outlook and is it advisable to buy at these lower levels to reduce the average cost of acquisition? — Kamal Riyaz

Sona Koyo (Rs 57): Reduce exposures as the stock is not likely to recover to your entry levels in the near term. The near-term outlook is not positive and a drop to Rs 47-48 levels appears likely.

Use a trailing stop-loss in the event of an upward move. Only a close above Rs 70 would reinstate positive outlook. Till such time, it would be advisable to reduce holdings.

IDBI (Rs 84.4): Investors need to realise that the strategy of "averaging the cost" by buying at lower levels is not a prudent strategy.

There is no point buying a stock that is in a downtrend. It will amount to putting good money after bad. Instead, investors may cut their positions size and wait for a logical entry point when a fresh "buy" signal is generated.

As far as IDBI is concerned, it would be advisable to pare exposures as there appears to be no signs of reversal of the ongoing downtrend.

We are looking at a drop to Rs 65-70 range. Have a stop-loss at Rs 81 and try to reduce holdings on price upticks.

Shall I buy Berger Paints at prevailing levels? — Suhas Pai

Berger Paints (Rs 59.1): The recent chart patterns do favour the case for buying this stock. The share price has withstood the recent carnage quite admirably.

The trend would turn bearish only if the share price closes below Rs 45.

Investors may accumulate the stock in a phased manner, with a stop-loss at Rs 45. A move to the Rs 70-75 range appears likely.

What is the future outlook for Hindustan Oil Exploration Limited purchased at Rs 187.60? — Rajesh Prabhu

Hindustan Oil (Rs 121): After a sharp rally that lasted till August 2005, the stock has been in a corrective phase in the past few months.

There appears to be no signs of the reversal of this downward correction.

A drop to the Rs 100-105 range appears likely. There appears to be little scope of a rally towards your entry price. Hold with a stop-loss at Rs 116 and look to reduce exposures on uptrend.

Please advise me about Matrix Labs bought at Rs 192 and NDTV bought at Rs 205. — K.S.Venkatachalapathy

Matrix Labs (Rs 172): The recent price pattern does not throw up significant clues about the near term direction. Hold with a stop-loss at Rs 160 and use a trailing stop-loss if the stock moves up.

The trend would turn positive only if the stock closes above Rs 192. Till such time, it would be prudent to stay clear of the stock.

Investors may reduce holdings as there is no point waiting in anticipation of an upward move to exit.

NDTV (Rs 144): The stock has dropped below key support levels and the next logical support level does not appear to be in sight.

Considering your entry level and the near term weak trend, the chances of the stock getting back to your entry price appears remote.

There is no point holding on to this stock. Try to reduce exposures in the stock.

Readers can send in their queries, on not more than two companies, to techtrail@thehindu.co.in

Queries can also be sent by post to: Tech Trail, 859/860 Kasturi Buildings, Anna Salai, Chennai 600002.

We would endeavour to answer as many queries as possible. However, constraints of space will limit the responses featured under this column.

(Note: The analysis and opinion expressed in these columns are based on the technical analysis of the past price behaviour. Opinion and price targets are based on the Elliott Wave Analysis. The stop-loss level provided with the recommendation is important. The original view would stand negated if the stop-loss level is breached. There is a risk of loss in trading)

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