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ShareThe Sensex is on course to move to the support zone at 13600-13800
Sensex (14571.29): Though the anticipated upward correction materialised last week, it turned out to be more short-lived than expected. After hitting the resistance zone of 15750-16000 mentioned last week, the trend turned bearish in line with expectations. The index is on course to move to the support zone at 13600-13800.
The key question now is: "Where is the market headed and how low we can get?"
At this juncture, there are quite a few possibilities with equal probability of occurrence and with varied degree of bearishness. It would, therefore, be premature to take a slightly medium- to long-term call now.
In the best case scenario, the index can seek support at 13600-13800 and get into a grinding and prolonged phase of ranging price action with an upward bias.
On the other hand, in the worst case scenario, the possibility of a test of June 2006 lows of 8800-9000 is also not ruled out.
Rather than getting ahead of time, it would be prudent to let the market provide clues about where it is headed. A close below 13600 would throw open the possibility of a test of June 2006 lows. And, there would be not respite from the bearish onslaught until 16000 is breached.
Investors may look to invest in other asset classes such as precious metals or commodity-oriented mutual funds to diversify risk, as equities are unlikely to bounce back in a hurry.
If one looks at the way the markets behave ahead of trend reversals, there is typically acceleration in price action in the direction of the original trend. We saw this phenomenon in the form of a run away rally during October-December 2007 just ahead of the eventual top in January 2008. A similar euphoria persisted ahead of the earlier major top witnessed in early 2000.
By the same token, a price bottom of any significance would occur only after a significant downward acceleration. From a behavioral science perspective, we are yet to see pessimism turn into an outright fear among investors. Unless we get the capitulation and the eventual shakeout, the chances of a market bottom being put in place would be slim.
After all, a bearish trend does not end until the market runs out of sellers.
Nifty (4347.55): The price action was in line with last week's expectations. The index reversed direction right at the resistance zone of 4650-4700 mentioned last week. After touching a high of 4679, the trend turned bearish since Wednesday. The index has now moved within the striking distance of the initial support zone of 4250-4300.
As observed last week, the index is expected to move further down to test the August 2007 low of 4000. A breach of this level would extend the downside risk to the June 2006 lows of 2600.
Though there is nothing to indicate that 2600 would be tested, it is definitely in the realm of possibility. The bearish view and a drop to 4000 would be favoured view until the index moves above 4750.
CNX Bank Index (5758.6): With inflation spooking past 11%, it was not surprising to note the pounding banking stocks took on Friday. This price action in this index, too, was in line with expectations. The trend turned bearish at the resistance zone of 6450-6500 mentioned last week.
The index is on a major downtrend and using Roger Babson's Action-Reaction methodology, a drop to 4750-4800 appears likely. The index has to move past 6500 to limit the scope for further damage.
Key pivotals: National Aluminium (Rs 428.5): Contrary to expectations, a bearish trend prevailed and the stock also dropped below the stop loss level of Rs 458 mentioned last week.
The breach of the stop loss level has negated the earlier bullish view and the stock could now slide to Rs 340-350.
Interestingly, the stock has turned bearish at a time when aluminium prices in the international market have staged a breakout from a corrective triangle pattern. The stock has to get past Rs 465 to rule out the possibility of further erosion in value.
Reliance Industries (Rs 2,097): This was one of the index heavyweights that managed to hold above the lows established in March. The sharp fall on Friday pushed the stock below this low of Rs 2,110. The stock managed to bounce off these levels on a couple of occasions and the failure to do so now is a cause of concern. A break below the immediate support at Rs 2,000-2,020 could lead to a test of Rs 1,650-1,700.
Bharti Airtel (Rs 766.4): The stock faced resistance right at the price zone of Rs 845-855 mentioned last week. The inability to move past the initial resistance zone and the subsequent break of support levels is a clear indication that bearish forces are in control.
The stock may slide to the next major support zone at Rs 675-690 range. Investors may prune holdings and the trend would remain bearish as long as the price rules below Rs 855.
Stock of the week:
State Bank of India (Rs 1,248): Stocks from the banking sector have borne the brunt of the selling pressure witnessed in the last few months. Recent price patterns indicate that the worst is not yet over for the sector and this stock in particular. A drop to Rs 1,100-1,125 appears likely.
A breach of this zone could push the stock to Rs 950-1,000. Investors may trim exposures while short positions may be considered with a stop loss at Rs 1,345. The stock has to close above Rs 1,400 for the bearish trend to subside.
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.
