Wkly Tech Analysis: Bears gaining strength

The BSE Sensex swung in a range of 908 points. From a high of 19,720, the index tumbled to a low of 18,811, and finally settled with a loss of 831 points at 18,860. Earning worries and fears of rate increases in the backdrop of high inflation, coupled with sell-off by foreign institutional investors (FII), weighed on investor sentiment.

Among index stocks, HDFC Bank was the major loser, down 9.5 per cent at Rs 2,053. Jaiprakash Associates, Larsen & Toubro, HDFC, Reliance, Tata Steel, Bajaj Auto, NTPC, Maruti Suzuki, Infosys and Cipla shed five-eight per cent each. Bharti Airtel, up one per cent, was the sole notable gainer.

Once below the crucial support zone, there were no takers in the market. The Nifty, after breaking 5,870 on the first day of the week, witnessed unabated selling and eventually dipped below its recent November low of 5,690. The index ended the week with a loss of 4.2 per cent (250 points) at 5,655.

The NSE Nifty is now just 44 points shy of its long-term (200-days) daily moving average (DMA). Last time the index dipped below this major level was in May 2010, following which it recovered quickly within a span of six trading days. However, in 2008, when the Nifty broke below its 200-DMA, we witnessed a steep fall of over 56 per cent in the following months, and the index took almost 11 months recoup.

<B>Case 2008 v/s 2010</B><BR>
The reason for the steep fall in 2008 was global financial crisis, wherein the world markets went in a free fall and there was a panic-like situation. However, in 2009, when the markets dipped briefly, FIIs and India Inc earnings turned the tide in favour of a quick rebound.

The situation this time is completely different. On the positive front, the world markets are at multi-month highs compared to the weakness in our markets. On the negative front, we are in the earnings season, but the bigger worries for us are pullout by FIIs and rate increases.

Also, this time, more than the economic and fundamental factors, technicals could play spoilsport for the bulls, as almost 2/3 of the Nifty 50 stocks are trading either on the verge or of below the 200-DMAs. As many as 14 Nifty components have broken below the 200-DMAs so far this year. And more importantly, these include select heavyweights like ICICI Bank, Larsen & Toubro, ONGC, Reliance Industries and State Bank of India. Other major stocks are - Axis Bank, Bajaj Auto, BPCL, HDFC Bank, Hero Honda, IDFC, Kotak Mahindra Bank, Maruti and Punjab National Bank.

Earlier, in 2010, 12 more stocks which slipped below the 200-DMA are yet to recover. Prominent among these are BHEL, DLF, NTPC, JP Associates, Reliance Communications, Reliance Infrastructure, SAIL, Sesa Goa and Suzlon. Others are Power Grid, Reliance Capital, Reliance Power.

HDFC, Ambuja Cement, Cipla, Jindal Steel, Siemens, Sterlite and Tata Power are the other seven stocks which are on the verge of breaking the long-term moving average.

Given this dicey situation, it seems that the bears definently have the upper hand. However, it should be noted that the Nifty is heading towards multiple support levels. Hence, bottom-fishing at lower levels cannot be ruled out as daily charts are close to the oversold zones. The 200-DMA is at 5,600 and the medium-term (50-weeks) moving average is at 5,500. A break of both in the worst case scenario could see the index tumble to 5,250, the short-term (20-months) moving average.

All-in-all, it’s going to be yet another volatile week given the action on the earnings front and government moves to tackle inflation. Weekly support is seen at 5,550-5,490 and resistance at 5,755-5,820.

Barring Bharti Airtel, Hero Honda, ACC, ONGC, Power Grid, Reliance Communication and Sesa Goa, most other Nifty 50 stocks are likely to exert downward pressure.