Bourses Poised Precariously

The course of the markets in the next few days will decided by the outcome of the war vibes

The week saw five straight days of decline as the war clouds thickened again. The Sensex ended at 3153.06 points, down 3.98 per cent. The Nifty was down 4.36 per cent at 1017.1 points. The Defty was down 4.28 per cent at 739.9 points.

Volumes declined across the board. Declines outnumbered advances by a wide margin and the broad BSE 500 was off 4.07 per cent. The Put-Call ratio moved into the oversold zone at 0.61.

Outlook: The massive declines have pulled the market down past several supports into a clear downtrend. The implications could be fairly nasty. The downside targets could be around 3000 Sensex (960 Nifty). After five days of downtrending, we could expect a short-term bounce. But this will be temporary and could hit resistance at 3200/1035.

Rationale: The trigger event for further moves is the resolution of the Iraq imbroglio either way. The war-fears coincide with the change in long-term capital gains tax which will lead to selling over the next couple of weeks. This could be followed by subsequent buybacks.

If war does erupt, the market will test successive supports at 3120, 3075 and 3000. In terms of pure technical readings, the market could downtrend for another 8-12 weeks. In practice, wars are events that markets discount unpredictably even if there has been an advance warning as in this instance.

We could have a very sharp, short downturn or we could have a market that drifts down gradually. Everything depends on the possibility of war, and on its outcome.

Counter view: Normally this sort of downtrend could be considered a decisive break. It has pulled the market out of a range that it had been trading since late-January. However, the trigger is a special event. If hostilities don't happen, the market could rebound very sharply. A critical signal of a rebound would be two or three successive closes above 3225 (1035).

Bulls and bears: It is tough finding bullish stocks this week. The declines were extremely broad in nature. Every sector was hit by bears. ICE was the worst hit, but there were big individual losers across every sector. Market leaders like Infosys, Satyam, Zee and Hero Honda were hammered.

Asian Paints received some support at lower levels. Castrol also found buyers on Friday. ITC showed signs of committed buyers on every decline. Tata Tea could turn out to be a defensive winner.

In F&Os try a bear spread by selling March Nifty futures and by buying April Nifty futures. The premium over spot Nifty on March is high and that of April is nearly at backwardation.

Earlier recommendations of 1040 Nifty Puts plus 1070 Calls are in the black. Hold the Put, close the call and buy a fresh Call at 1040. That way, you're covered in case the market suddenly reverses.