Short Term Rally Expected
Doom and gloom continued to be the flavour of the week. In addition to the problems with southern allies, the BJP now has to contend with possible withdrawal of support from the Akalis over the Uttarakhand issue. Globally things got worse too with the Asian crisis and the Monica Lewinsky testimony. Analysts fear that the US economy is slowing down and if can push the entire planet into a recession.
Be that as it may, Indian markets slid further. First quarter corporate results have been extremely poor, the World Bank has passed strictures on India in its latest macroeconomic update. To cut a long story short, the outlook is bleak.
This week the Sensex has lost 4.65 per cent. The Nifty dropped 3.85 per cent. The BSE-200 lost 2.69 per cent while Dollex went down 2.67 per cent. Advances to declines stayed negative with 406 shares up versus 521 down. The background technical signals are bearish but there are some puzzling divergences. The excessive drop in Sensex values compared to other indices is unusual but it is not really a signal of strength. I would interpret it to imply underlying bearishness which did not translate into greater losses across the board because of lack of trading in illiquid smaller shares.
But there are two signals that seem to indicate a quick pullback in the first couple of sessions of next week. The Sensex has hit a double bottom at 3062.25, which was a level touched on Wednesday. It appears to be extremely oversold on short-range momentum indicators. This could mean a quick switch in the short term trend. But it will only be a cosmetic recovery. The lack of breadth of volumes or strength in other market segments will prevent a genuine turnaround.
By definition, the index performed a bearish pattern this week as it broke below an important support at 3085-3090. Right at the moment all three trends - short term, intermediate and long term are bearish. The intermediate trend has been bearish since July 17, the short term trend went bearish last week and the long term trend worsened on April 22. The long term trend could stay bearish for a long time and the intermediate trend could stay bearish for another 4-6 weeks. As earlier stated, the short term trend may switch soon.
Upside resistance now starts at 3140-3160 points and there will be very strong selling pressure around 3235-3256. The Sensex could continue to see declining peaks and valleys until the intermediate trend changes at least. In the downtrend since the peak of July 17 at 3526 points, it has seen dynamic resistance around a dropping trendline at a sharp minus 68 degree angle.
A breakout past that trendline would be the best signal of a bullish intermediate trend. Another signal would simply be a rise past resistance at 3299 setting up a new higher peaks pattern. On the downside, Fibonacci analysis suggest a possible bottom in this intermediate downtrend around 3000 points. If that point break then 2950 may be the last line of support.