Sensex is at a crucial level, Investor Guide frm ET

Sensex is currently at a crucial level

The Sensex, after recording its all-time high of 21206 points in January 2008, has been trading lower. The broader trend has turned negative, as the long-term upward bias channelled trend for the index has been breached in January 2008. Since the index has been trading below the channel trend line and continues to form lower highs and lower lows.

The bear phase that began in January 2008 would remain intact for minimum 18 months, which is the one-third of the time period taken by the Sensex bull rally which began in May 2003 and ended in January 2008 (lasted for 56 months of time period). Hence, the bear phase would continue to last for a minimum of 10 months more i.e. up to July 2009. However, it remains to be seen whether the recent low of 12514 formed in July 2008 would remain intact, as the bottom for the current bear phase, or if the Sensex would form a new low below 12514.

Sensex’s downward move from its all-time high of 21206 on the weekly chart is channelled and continues to from lower highs and lower lows, indicating the continuation of the bear phase. As long as the index continues to form lower highs and lower lows and moves within the channel, it is most likely to slip below its recent low of 12514 to form a new low. During the current downtrend, we have so far witnessed three rallies and each rally has been of minimum 3000 points and the fall, following the rally, has been of minimum 5000 points.

The Sensex opened with a bullish gap during the week and recorded a high of 15107 on Monday, rising by 624 points intra-day. However, it failed to hold on to its initial gains and corrected subsequently to end the week negative by 483 points. The Sensex has given a close at 14000 levels, which is very crucial. The rise from 12514 recorded in July 2008 till date has formed a NeoWave “Extracting Triangle” pattern or a “Head and Shoulder” pattern. Trading below 14000 levels for two consecutive days would confirm the bearish breakout of the pattern, under this scenario the Sensex could move down to 13727-13505 points. Any pull-back would get resisted at the neckline whose value for the current week is placed at 14215. Above this level, the next resistance is placed at 14523, which is due to the weekly channel resistance trend line. At higher levels, the Sensex move above 15579 level would negate the negative outlook for the index, in which case fresh buying can be suggested. Until then, stay away from the market.

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Week Ahead: Poised for downside breakout
The market weakened noticeably in another lacklustre week. The Nifty found support at 4,200 on Friday to close at 4,228.45 points for a loss of 2.85 per cent. The Sensex was down 3.33 per cent at 14,000.81. The Defty lost 4.94 per cent as the rupee slid sharply.

The overall breadth perspective was extremely negative. Advances were far outnumbered by declines. The Junior lost 3.67 per cent and the BSE 500 lost 3.3 per cent. Volumes were low except on Friday where there was massive selling. The FIIs were large and consistent net sellers and the domestic institutions were also net sellers.

Outlook: The market may be poised for a downside breakout. It has already tested a key support at 4,200. If it closes below 4,180, a drop till the 3,950 level is very likely though there is plenty of interim support between 3,950-4,150.

Rationale: An intermediate uptrend started at the low of 3,790 in mid-July and after eight weeks, the trend could well be reversing. The past two weeks have seen tightly rangebound trading on low volumes.

On Friday, the lower end of that range was tested with volume expansion. If there's a breakout (close below 4,179) the downside would be at least 3,950 and maybe, lower. A pessimist would project a low between 3,700-3,800.

Counter-view: Despite the selling pressure, the support at 4,200 did hold. It is possible that the index will continue to range trade. However it seems unlikely and a sharp recovery seems impossible unless there's a big volume expansion and reversal of institutional attitude.

Bulls & bears: There were almost no bulls to speak of. The big losses came in the IT sector and in realty and banks. In one sense, the CNXIT's loss of 3.07 per cent was surprising since the rupee dropped. Most of the losses came on Friday when bellwether Infy dropped 6 per cent and every IT major lost ground.

The selloffs in banking and realty were less paradoxical. The Bank Nifty lost 1.5 per cent and is very likely to lose more next week. All key banking and financial stocks look bearish but the PSUs such as PNB and BoB may hold ground better.

Realty seems to have a 3-week sell cycle and is not likely to recover until short-covering comes in near settlement. Metals saw selling through the week but a recovery of sorts was noticeable on Friday as Sail and Nalco stabilised and the bearish momentum in Tata Steel eased.

Apart from these, pivotals like Reliance Industries and Reliance Infra were also bearish. On the buyside, Airtel is one of the few heavyweights that could move against the tide.
Hind Unilever, BHEL and NTPC may also hold their ground. New listing Austral is still getting high volumes as well though it is much too early to take a technical call.

MICRO TECHNICALS
AirtelCurrent Price: Rs 778.85Target Price: Rs 810
The stock dropped to a low of Rs 745 from a September high of Rs 848 before it started to firm up on Friday. It has the potential to climb till Rs 810 at least on an intra-day basis. Keep a stop at Rs 770 and go long. Be prepared for an intra-day swing of around Rs 50-60. Book profits above Rs 805.

Bhel Current Price: Rs 1,698Target Price: Rs 1,735
The stock has made a sharp recovery from Rs 1,660. It has potential to rise till around Rs 1,735. Keep a stop at Rs 1,690 and go long. Start booking profits above Rs 1,725 because higher prices may not be sustainable except on an intra-day basis.

Reliance Capital Current Price: Rs 1,210.20Target Price: Rs 1,050
The stock is testing a key support and if it closes below Rs 1,200, it will have a downside target of Rs 1,050. There is some interim support at Rs 1,125. Keep a stop at Rs 1,225 and go short. Book a partial profit at Rs 1,125 and hold the rest of the position down to Rs 1,050.

Reliance IndustriesCurrent Price: Rs 1,932Target Price: Rs 1,750
The stock has made a downside breakout with a sharp volume expansion. The target projection from the charts suggests that a target of Rs 1,650 is possible. However, RIL is already close to its 2008 low and those projections may be wildly inaccurate. A conservative target is Rs 1,750. Keep a sliding stop at Rs 1,970 and go short. Move the stop down by Rs 20 for every 20 point move in the stock. Book profits at Rs 1,750.

Tata Steel Current Price: Rs 523.65Target Price: NA
The stock is at its 2008 low. It made the downside breakout by closing below Rs 590 in early September and then it broke Rs 560, which was the next support. The downside target could be Rs 520 or Rs 490 depending on the strength of the current support. The upside would be Rs 560 on a bounce with some resistance at Rs 540. A long position with a stop at Rs 515 looks the best chance. Book some profit at Rs 540 and cash out above Rs 555.

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