Sensex likely to enter bull orbit only after crossing 15300
18 Aug, 2008, 0301 hrs IST
It has been a decent run for the market with more leaps than hops, in the past few weeks. Some of that momentum has eased last week. At this juncture, the Sensex is trading below the 15000-level. Looking at the market from here on, the 14900-mark — crucial for the continuation of the current trend — has been breached. This may revive forgotten pains of wealth destruction for participants seen in the past six months.
Technically speaking, as per the Elliot wave, the current fall that started from 21207 (6357) has shown a Falling Wedge’ Structure. In this structure as seen in the chart, the A-B-C formation of the bear trend got completed. After this, the Sensex formed a bottom of 12514 mid-July which is also near the 50% retracement level of the past five years’ uptrend (2904-21207) of 12300 (3700). After this significant bottom, the index witnessed a swift rally of 3000 points in just 21 trading sessions, raising hopes of a further upmove.
Major contributors to this rally were shares of banks and capital goods companies. However, we have broken this momentum and this break may play just the decisive role in inducing further movements. Here is where the level of 14900 is significant. First of all, looking at the current upward movement closely, one would see a higher-top, higher-bottom pattern formation. For this pattern to remain intact, the index has to close above 14900. Secondly, if we look at the trend line joining bottoms that were formed along the way by the Sensex in this past rally, the level of 15000 is a threshold for its way up.
Thus, a closing below 14900 is a decisive breach of this trend line. The breach downward signals the termination of this trend and beginning of a corrective trend. Also, the Relative Strength Index Oscillators on daily charts is in an overbought territory and is turning downward. This indicates fatigue in the market thereby inducing some more profit-booking. After consecutive four positive weekly closings, the Sensex witnessed a decline of 444 points, showing a bearish candle on weekly charts thereby confirming the probable trend reversal.
What next? After this development, no prizes for guessing the direction of the market. If we have to put a tentative number to the next level, we may look at one of the trend reversal properties, according to which more often than not key retracement level of 50% of the preceding uptrend is tested. If we were to trace the current rally for the Sensex of over 3000 points from 12514 to 15580, the 50% retracement level comes near 14000.
There could be good buying support at this (14000) level. This level has another significance as well since the 34 DMA (daily moving average) is also placed near this level. The odds are against a further rise on the back of this weekly close, but if the market does manage to escape out of this bear momentum, the bounceback will find congestion levels, placed at 15000 and subsequently at 15300.
The Sensex needs to sustain above 15000 and decisively breach 15300 to enter the bull orbit again. If the market were to test lower levels once again, shares from the capital goods, auto and banking sectors appear to be good bets. Bharat Heavy Electricals and Bharat Electronics among capital goods shares, Maruti and Hero Honda in the automobile sector, and ICICI Bank and Jammu and Kashmir Bank in the banking sector look good on the charts.
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