Pullback will be short-lived

This week reminded us of the kind of capitulation we had seen in 2008, or, at the beginning of this calendar year. Select mid- and small-cap stocks witnessed heavy selling, wherein a couple like Kwality Dry and Edserve lost 50 per cent value in just five trading sessions.

Fears of the euro debt contagion spreading to bigger European economies unleashed a sell spell on the world markets. The Sensex plunged five per cent to 16,372. And, the mid- and small-cap indices dropped seven per cent each.

Among the Sensex stocks, Jaiprakash Associates slumped 18 per cent to Rs 62.20. BHEL, too, tumbled 15 per cent to Rs 276. Mahindra & Mahindra, Maruti, DLF, Tata Steel, Coal India, Reliance Industries and Sterlite were the other major losers. Cipla, however, zoomed nine per cent to Rs 314. Bharti Airtel and Hero MotoCorp were the only other stocks to finish with gains.

Last week, we had mentioned that the Sensex seems headed towards its first monthly support level of 16,880. In case this is broken, the index may drop lower to 16,625 or 16,365. The fact is it went much lower to 16,165.

According to the monthly fibonacci charts, the Sensex has given a strong sell signal for this month. There are strong indications from momentum oscillators like the moving average convergence/divergence and the average directional index that the markets are likely to head lower. Hence, any pullback from the current levels is likely to be short-lived.

In case of a pull-back or a relief rally, the Sensex is likely to face strong resistance around 16,900. On the downside, it could re-test its October low of 15,750-odd levels, below which the next support is placed at 15,200. The NSE Nifty moved in a range of 391 points: From a high of 5,229, the index dropped to a low of 4,837 and finally settled with a loss of 263 points at 4,906.

Last week, we were expecting the Nifty to find support around 5,000-5,050 range. While the support was held in the first half of the week, in the latter half, once the support was shorn, we saw a sharp fall.

The daily charts indicate there could be a bounce back or a relief rally if the index sustains above 4,920. A fibonacci retracement (say 38 per cent of the recent fall) gives us a first target of 5,050. A 50 per cent retracement can take the index to 5,120 and a 61.8 per cent can surge it to 5,185.

To negate the recent bearishness; the Nifty will have to give a strong weekly close above 5,150 the next week. Failure to do so could mean some more consolidation at lower levels.

Next week, in case of weakness, the index could re-test its long-term weekly moving average, which is around 4,780. This level has given support twice in the last four months.

The lower end of the bollinger band on the weekly charts indicates support around 4,620. At the cost of spelling real doom, either a weekly close below 4,620 or a monthly close below 4,750 could be the final nail in the coffin as far as the markets are concerned.