Recovery depends on short covering

MACRO TECHNICALS

The market experienced five consecutive losing sessions this week. The Nifty closed at 4,982.6 points, down by 4.69 per cent. The Sensex was down 4.90 per cent at 16,737 points. The Defty was down 6.68 per cent as the rupee slid to a 15-month low.

Breadth was uniformly poor. Declines far outnumbered advances. Volumes slid. Both FIIs and domestic institutions were net sellers. Smaller stocks under-performed the giants. The CNX Nifty Junior was down 7.5 per cent, while the BSE 500 was down 4.9 per cent and the Nifty Midcap 50 was down 5.95 per cent.

Outlook: The market has broken several key supports and it could slide until the 4800-level before it stabilises. It's isn't confirmed, but the intermediate trend may have switched directions after being up for six weeks in a row.

Rationale: The Nifty has declined 6 per cent in the past five sessions so it has been an orderly retreat. But, it has breached the key support of its own 200 DMA, which is currently at about 5,025. An intermediate uptrend in a bear market tends to mature early and six weeks (which is how long this trend has lasted) is about par.

However, the intermediate trend reversal is not confirmed. Trend reversal confirmation would require a drop below 4,800 (lower trough) and a termination of the subsequent bounce (lower high) at below 5,300.

Counter-view: There is some support at the current level and volumes have remained reasonable. It is possible, even likely, that the losing streak will end in the next two sessions as short-covering comes in. There is still room for the intermediate uptrend to continue if any short-covering translates into a serious rally.

Bulls & Bears: Banks were inordinately hard-hit with the Bank Nifty losing 7.28 per cent