Week Ahead: Negative breadth could lead to more weakness

MACRO TECHNICALS

The crisis on Wall Street sparked off extreme volatility on global markets. The Nifty hit a low of 3,799 points on Thursday before rebounding to close at 4,245 for a small nominal gain of about 0.4 per cent.

The Sensex displayed similar behaviour and closed at 14,042 points for a gain of 0.3 per cent. The Defty was down 0.67 per cent due to the rupee weakness though the currency did recover from around Rs 46.9 to about 46.3 and the NSE contract is trading at Rs 45.89.

Breadth indicators were unusual and suggested that the bullishness was confined to the top 50 stocks. Advances were outnumbered by declines on a week-to-week basis with mostly losses outside the F&O universe.

The Junior lost 3.7 per cent while the BSE 500 lost 1.7 per cent and the Midcap 50 lost 4.7 per cent. Volumes were very high on the last two sessions. The FIIs continued to be consistent sellers while Indian institutional buying was evident.

Outlook: Two days of turmoil have clouded the market dynamics. Based on the weak performance of the wider market, the chances are that the Nifty will also weaken. However, settlement considerations also come into play. The volatility is likely to continue through next week. Most of the volume will be in Nifty and its constituents.

Rationale: The market broke a key support and confirmed an intermediate downtrend when it dropped below 4,180. However the support at 3,799 held and the subsequent bounce pulled it above 4,180 again. On the upside, there is solid resistance between 4,350-4,450 and that could be a limit.

On the downside, 4,050 seems a reasonable support. Post-settlement, the support at 3,800 is likely to be tested again. So, swings between 4,000-4,450 with a downside bias, seems the likeliest trading pattern.

Counter-view: Short term sentiment seems to have improved. The Nifty universe could remain propped up above 4,200 unless there’s more bad news from the US. Nevertheless, the poor performance of the wider market, the selling from FIIs and the breakdown of the intermediate trend leads to a negative outlook.

Bulls & bears: The split in the performance of mega-caps and other stocks last week and settlement considerations could cause an interesting dichotomy. Smaller F&O stocks are liable to see short covering and some price recovery so there’s a case for being long on the Junior basket. However, most of the volume will be in Nifty stocks.

The most sensitive sectors are banks, IT, real estate, oil and metals. The outlook on banks seems neutral. IT is somewhat negative but liable to short-covering especially in Satyam, Wipro and Infosys.

Real estate seems negative or neutral, oil and refining stocks such as Cairn and Essar may have some upside, metals may have bottomed but an upside looks unlikely. Power sector plays like Bhel, ABB, NTPC and Suzlon seem to getting some support.

MICRO TECHNICALS

Bharti Airtel
Current Price: Rs 805.85
Target Price: Rs 840

The stock has seen a recovery from Rs 730 on decent volumes. It has the room to rise till Rs 840 before it runs into heavy resistance. There is good support at Rs 800 and at Rs 780 but be prepared for volatility. Keep a stop at Rs 800 and go long. Cover at Rs 835. If the stock drops below Rs 795, go short with a target of Rs 780.

Cairn India
Current Price: Rs 220.9
Target Price: Rs 235

The stock bottomed at Rs 190 and has made a steady recovery albeit on average volumes. It has room to run up until Rs 235 - Rs 240 where it will hit very serious resistance. Keep a stop at Rs 210 and go long. Cover above Rs 235.

ICICI Bank
Current Price: Rs 627.5
Target Price: Rs 600

The stock has made a sharp recovery but it has a bearish volume pattern. Volumes on the upticks have been much lower than volumes on downturns. There’s strong resistance at Rs 630 so there’s not much upside. The scrip is more likely to settle lower at between Rs 590 - Rs 600. Keep a stop at Rs 635 and go short. Cover below Rs 600.

NTPC
Current Price: Rs 182.95
Target Price: Rs 195

The scrip has a mildly bullish pattern. It is range-trading between Rs 165 and Rs 195 and this is one of the periods of upswing. While Rs 195 is unlikely to be penetrated, the target should be reached. Keep a stop at Rs 178 and go long. Start covering the position above Rs 192.

Satyam
Current Price: Rs 369.8
Target Price: Rs 395

Satyam hit a low of Rs 322 before it started bouncing. Volumes have picked up and it has the potential to go till Rs 395 if it can break resistance at the current level. Keep a stop at Rs 365 and go long.

(The target price and projected movements given above are in terms of the next five trading sessions unless otherwise stated.)