Technical Analysis

Stocks on a slippery slope

LOKESHWARRI S. K. | Updated on April 07, 2013 Published on April 06, 2013

Sensex slipping below their 200-day moving averages.   -  PTI

Indian benchmark indices that have been precariously poised over the last two weeks began slithering down last week. The Nifty has closed below the 5,600 level and the Sensex below 18,600, much to the consternation of investors. There was also a lot of brouhaha over the Nifty and the Sensex slipping below their 200-day moving averages.

It, however, needs to be understood that the 200 DMA is a long-term support and so a filter of at least a couple of weeks needs to be applied to confirm a downward breach. But there was an erosion in investor confidence last week and investors appear to be waking up to the fact that there might not be an improvement in the economy or corporate earnings in the next two quarters.

Investors who bought shares with the hope of the Sensex and the Nifty rising to a new high soon appear to be capitulating now.

Through this mood of general despondency, there were pockets of intense activity in pharma, sugar and telecom stocks based on news affecting these sectors.

Cash volumes were subdued while derivative volumes improved towards the later part of the week. Index put call ratio declining below 1 implies that many of the short positions were covered in the recent decline. FIIs turning net sellers added to the gloom.

The industrial production data to be unveiled next week will give us further clues about the trajectory of economic growth. Investors will turn their eyes skywards in a bid to watch the progress of the South-West monsoon.

The RBI’s next move in its annual monetary policy meet scheduled in early May is another event that can dominate tea-time conversation.

The Sensex and the Nifty forming successively lower troughs since March 4 is not a good sign. Oscillators in the daily chart are in the oversold zone but they are pointing lower, implying that the short-term down trend can continue.

The weakening of the weekly oscillators is of particular concern. The weekly relative strength index is featuring at 43 and the weekly rate of change oscillator has just moved into the negative zone.

This implies that the medium-term trend is weakening for the index.

Sensex (18,450.2)

The Sensex recorded the intra-week high of 19,060 before sliding lower last week. The reversal from the 19,000 level confirmed that the third leg of the down-move from 20,203 peak has not ended. As explained earlier, this move has the targets of 18,814, 18,315 and 17,761.

If we break the down-move from 19,755 further, we get the targets at 18,326 and 17,873. The recurrence of the targets close to 18,300 and the trough at 18,256 formed last November makes us look at the area around 18,300 as the possible halt, if the index slides further.

If the decline does not halt here, subsequent targets would be 18,000 and 17,800.

Short-term resistances for the index will be at 18,820 and 19,060. The short-term view will turn positive only on a strong move above 18,820.

Nifty (5,553.2)

The Nifty hit the high of 5,754 before reversing lower last week. As explained earlier, the downward targets of the current move from 6,112 peak are 5,693, 5,522 and 5,350. If we break down the wave count further, we arrive at the targets of 5,527, 5,388 and 5,162.

Note the recurrence of 5,520 levels in both the counts. The index almost reached this level on Friday. We therefore need to exercise a little bit of caution with short positions.

But if Monday opens on a weak note, it will mean that the index is headed for 5,450 that is the 50 per cent retracement of the move from 4,770 low. Since the target of the minor count occurs at 5,388, investors need to watch their backs in the zone between 5,400 and 5,450 next.

Short term resistances would be at 5,670 and 5,754. Short positions need to be closed on move above 5,670. Medium-term trend will turn positive only on close above 5,750.

Global cues

Global markets gave up some of their gains last week on the sabre rattling by North Korea. Weak US jobs data with only 88,000 jobs added in March derailed the US market on Friday. This number is almost half of the expected number revealed by surveys. This sent investors scurrying to the safe haven of US treasuries and gold.

The Dow’s attempt to break higher fizzled out at 14,683 and it dipped slightly from those levels. Short-term support for the index is at 14,350. As long as this level holds, the index can be expected to break higher to 15,400 or 15,700 over the medium term. As of now, the 14,700 level is turning in to formidable wall in front of the Dow.

The Bank of Japan’s aggressive move to stimulate Japanese economy helped the Nikkei move to a four year high. Next target for the Nikkei is 14,000 that occurs at 61.8 per cent retracement of the decline from 2007-peak at 18,000. It is also likely that the index manages to move beyond this to the aforementioned peak.

Gold had investors at the edge of their seat last week as it hit the intra-week low of $1,539. But as we have said earlier, the yellow metal has significant support at $1,520 from where it has bounced thrice since September 2011. There is another significant long-term support band just below between $1,450 and $1,480. We will wait for this band to be breached before concluding that the long-term trend has reversed in gold.


Published on April 06, 2013
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