Bear romp may push Sensex to 9000

With corporate results coming up, stage may soon be set for the next major move.

SWNSEX (13102.18): Contrary to expectations, the trend was distinctly bearish during the week gone by. The lack of follow-up buying and the sustained bearish pressure during the week has cast a shadow on the earlier short-term bullish view. Though the case for a short-term bullish trend and a rally to at least 15500 is still intact, the damage during the last few days is a cause for concern.

That the index has slipped below the 61.8% retracement of the rally from the low of 12558 to the high of 14221 is another sign of weakness. The only comforting factor is that the index is holding above the crucial swing low-cum-support zone at 12550.

A drop below 12550 could throw open the earlier bearish case scenario of a drop to June 2006 lows of around 9000. Though a test of the June 2006 lows is the preferred view from a long-term perspective, the expectation is that the index could rally to 15500 or 17000 (in the best case scenario) and the journey towards the 9000-mark would commence subsequently. The long-term bearish case scenario would be negated only on a close above 18000.

The market is headed towards a crucial phase and the price action over the next few weeks would have a major impact on the next directional move in the index. With corporate earnings season kicking off soon, it would not be unreasonable to expect a lot of turbulence and the stage may soon be set for the next major move in the index.

Nifty (3985.25): There were a lot of reasons to cheer the week before last and the price action over the past few days has almost negated that week’s bullishness. Crucial support zones have been taken out with effortless ease and a close below 3780 would result in an acceleration of the downward move. The index has to now close past the recent swing high of 4303 to offset the scope of further fall.

Technically, the index is moving within the boundaries of a well-defined downward trend channel. A move above the upper parallel line of this trend channel is the minimum requirement to suggest that the worst is over. Else, a retest of the lower parallel line of this trend channel at sub-3300 range is not ruled out. This is also in conformity with the possibility of a drop to June 2006 lows based on Roger Babson’s Action-Reaction tool.

Considering that two different tools point out to the possibility of further fall, it would be prudent to wait for signs of bullishness to resurface before committing fresh funds. A move past 4303 would be an early sign of strength and a close past the upper parallel of the downtrend channel at 4350 would be a more convincing evidence of bullishness case scenario. Investors may wait for the market action to unfold over the next few weeks and take a decision after assessing whether crucial support or resistance levels are taken out.

CNX Bank Index (5828.6): The index is still confined within the boundaries of the trading range marked by 6750 on the upside and 5600 at the lower side. A trending phase would emerge only if the index gets out of this trading zone. On the longer time frame, there is a case for the index to have completed a bearish “head and shoulder” pattern in the monthly chart. The index has tested the neckline of this pattern and has turned down subsequently.

 As long as the index trades below 6800, the pattern would be valid and so will be the chances of a drop to sub-4000 levels. Investors need to tread with caution as quite a few stocks and sectors have confirmed their long-term bearish trend and the consequences of the same could be quite devastating. The next few weeks would be crucial and provide vital clues about the long-term health of the market.
 
Key pivotals:
 ICICI Bank (Rs 561.3): The stock has been one of the worst performers in the past few weeks. There are no signs of completion of the downward move and a test of the support zone at Rs 480-490 appears likely. Short positions may be considered on rally with a stop loss at Rs 625 and target of Rs 490. Only a close past Rs 650 would negate the chances of a drop either to or below Rs 490.

Infosys (Rs 1,447.7): The failure to move past the initial resistance zone at Rs 1,750 and a subsequent fall below the support at Rs 1,450 are signs of weakness. This has negated the earlier bullish view and the stock could now test the next support zone at Rs 1,250-1,275. The immediate resistance is at Rs 1,500-1,525 zone. Short positions may be considered on the evidence of weakness at this zone with a stop at Rs 1,560.

Reliance Industries (Rs1,961): The weakness in this stock was instrumental in pulling down the benchmark indices during the week. There is a strong resistance at Rs 2,035-2,050 range. Short positions may be considered at this zone with a stop loss at Rs 2,100 and target of Rs 1,725-1,750. A close past Rs 2,130 is required to negate the scope for further fall.
 
Stock of the week:
Reliance Capital (Rs 1,173): The stock is in a short-term downtrend and faces strong resistance at Rs 1,245-1,260 range. Short positions may be considered at or beyond Rs 1,245 with a stop loss at Rs 1,320. Short positions may be covered at the support zone at Rs 975-990. Positional traders may wait for the stock to drop to the support zone and consider long positions on the evidence of support at Rs 975-990. Stop loss for long positions may be placed at Rs 950; the target for long positions may be placed at Rs 1,250.
 
 (Note: The analysis and views expressed in this column are based on the technical analysis of historical share price action. There is a risk of loss in trading. Views and targets are arrived at by using the Elliott Wave Theory and Point & Figure technique. The author does not have investment exposure in the stocks discussed above. Comments and feedback may be sent to bkrish16@gmail.com)