Market Awaits Sebi Decision

For all intents and purposes, the market went nowhere this week. It traded in a very tight range as participants waited for the key Sebi meeting this week. With a favourable outcome, the possibility of a strongly bullish move is quite good. On the other hand, an inimical outcome would probably result in a sharp fall.

The Sensex traded up to 3,630 before settling at 3,559.77 for a small gain of 1.28 per cent. The Nifty behaved similarly gaining 0.92 per cent at the closing level of 1,140.5. The BSE 200 - Dollex combo reflected the rupee's stabilisation by gaining 0.28 per cent and 0.20 per cent respectively.

The broad BSE 500 rose 0.29 per cent while the BSE IT Index showed a negative divergence by losing a nominal 0.13 per cent. Volumes have dropped further. Outstanding positions are now negligible. The breadth indicators showed little change. Advances were slightly outnumbered by declines.

The chart patterns are fairly obvious where the broad market movement is concerned. The Sensex is hovering on the cusp of an upside breakout. It has almost completed a bullish reverse Head and Shoulders formation, initiated in mid-March.

This is not a classical symmetrically perfect pattern and the left shoulder is hunched up. The bottom came at 3,096. The neckline has formed between 3,585-3,650. A breakout past 3,650 could achieve an upside target of around 4200. However trading volumes have also been low and the upside target would probably be lower unless there is a powerful volume expansion with the breakout.

The Sensex has faced powerful resistance in the 3,585-3,650 zone and been forced back several times. An unfriendly set of Sebi decisions would probably abort the formation. If that occurs, prices will fall until support at 3,435 at least. More likely, support at 3,325 will be tested and quite possibly the current bottom at 3,096 as well.

The long-term trend does show signs of bottoming out. So it's possible that the market will hold above 3,096 regardless of the Sebi decision. The intermediate trend has moved sideways or been marginally positive since April 16 when the 3,096 bottom was created.

In the last month, we have seen the formation of a pennant/ wedge inside the reverse H&S. Pennants are usually continuation patterns telling us little about the direction of the immediate future. However, the higher troughs in the formation are a positive signal and we do know that pennant breakouts tend to come on high volume when they occur at all. So either way, the Sebi decision is likely spark higher levels of market activity in the next week. We will certainly need higher volumes to overcome huge supplies that will be available above 3,650.

The short-term trend frankly seems to mirror pessimism. There was selling pressure across the board in old and new Economy stocks. Winners such as Zee Telefilms and NIIT were few and far between. If the trend does break, there are likely to be few stocks that retain defensive strength. In case, Sebi again defers a decision, the market is likely to show signs of greater volatility..l