Intermediate Downtrend May Be Easing

The market showed some signs of stabilising this week. The FIIs were actually net buyers in a couple of sessions, intra-day volatility eased up and the indices showed net gains. Background indicators were also a little better than previously noted and the priceline appears to have found an important support around the 2950 Sensex mark.

The Sebi ban on short sales has left a dangerous overhang of long positions in the market however. Once bulls start unloading those positions, the market may see a lot of downside pressure since there will be no corresponding buoyancy from bear covering. However Sebi is supposedly rescinding the ban by July 6, so the technically overbought situation should not last very long.

The Sensex ended the week at 3168.82 which was a recovery of 0.80 per cent. The Nifty ended at 924.35. The Dollex was held 0.38 percent above previous values even as the rupee continued to slide. The BSE200 was up by 1.58 percent.

Volumes stayed low and trading remained thin across the board but the ratio of advances to declines showed positive for the first time in nine weeks. The week saw 594 scrips gaining while 449 declined. Other broader indices also showed signs of positive movements. The Asa Allshares Index gained 1.62 percent while the BS Midcaps-100 and BS Midcaps-250 gained 5.48 per cent and 2.35 per cent respectively. The lopsided gains in large midcaps is a sure indicator of FII interest since this is the main FII focus point. The BS-Smallcaps index moved up only 0.56 per cent.

From both chart and timing point of view there seems some hope of a temporary reprieve. The intermediate trend has been down since April 22 when it topped at 4322 points. Such trends can stay in force from between 6 weeks to three months. The trend could therefore be close to maturity. In that case the Sensex should show a pattern of rising peaks and valleys.

From the chart point of view there has been a clear show of support at the zone 2950-2965. In the past fortnight, the sensex has thrice found support in that region. This is a bullish signal which must be taken with a pinch of salt since the support did not come with any great volume expansion. But it could signal both a short-term uptrend which is being confirmed by the small gains this week, and also a definite demand point on the charts.

At any rate, that zone also benchmarks the extent of the fall so far. If the sensex holds above it in the next downmove then there is a good chance that the intermediate downtrend will ease. One would expect this test of 2950 to occur next week when most of the long positions will be unbundled. Once the market ceases to be technically overbought (and that itself is a sign of inept handling on Sebi's part after a drop of 27 percent), it will probably start to move neutrally. A great deal of bear pressure is unlikely -- short-sellers will not find matching buyers easily, and panic exits have already cleared out the faint-hearted. However to confirm a reversal of the intermediate trend, the minimum target on the next short range upmove must be 3250 plus.

The long term indicators show the market as oversold. But, a strong downtrend could keep the market that way for a long while. There is little chance of the market showing a long term revival unless 3575 level is breached. The chance of that occurring quickly looks remote.