The Intermediate Downtrend

The market slid until the last line of support before seeing a small technical rally. However it seemed to run out of steam on Friday confirming that the uptrend since June 23 was terminated. Thus the three major trends of Dow Theory -- the short-term, the intermediate and the long-term -- are possibly back in phase, being uniformly bearish.

The Cauvery waters issue hangs fire in the Supreme Court. There are also strong rumours that the next installment of the Jain Commission papers will spark another crisis.

The Sensex ended up 1.26 percent at 3211.31 points. The BSE-200 was up 1.48 percent while the Dollex rose 1.41 percent as the rupee suffered nominal losses. The nifty was flat. Other indices such as the Allshares rose 0.87 per cent, and the Midcap-250 rose 0.96 per cent, the Midweighted -100 rose a sharp 6.01 per cent. This segment witnesses much institutional action and there was also a great deal of bear-covering. Hence the abnormal increase.

The Smallcaps fell 0.72 per cent which was one of many negative divergences. The advance to declines ratio was also negative with 463 shares rising while 514 shares fell and only 59 held their ground. Trading was also thin with 6000 scrips untraded and volumes were also low. These are all bearish signals, and I suspect that the lack of trading in small caps masked a much more bearish trend than the Sensex suggests.

While the background indicators remained negative, it must be assumed that the slowing in the momentum of the downtrend and the nominal rise in various indices indicates that the selling pressure has eased somewhat.

The prediction last week was that the Sensex had to land somewhere above the 3089 zone inside two sessions for the intermediate uptrend of June 23 to remain in force. Well, the Sensex eventually bottomed at 3085 by Tuesday. Technically, this was a double bottom and the rally upto current levels has fulfilled that expectation. The many negative inferences make it likely that it no more than a technical pullback from an oversold position.

The collapse of the intermediate uptrend is almost confirmed since apart from the (slightly) lower bottoms, the resistance at 3235 terminated a short-term rally well below the 3370 level which would be the minimum required to even contemplate higher peaks. The resistance at 3230-3256 is clearly marked as a difficult barrier to beat since the Sensex was pushed down from that level on two successive sessions. Just slightly further up is an enormous resistance at 3300 points.

The current short-term trend looks negative. It may terminate above 3160 where the next support lies. But a fall to 3090 looks very likely. In a classic intermediate downtrend, since the peak at 3525 on July 17, the next bottom should come below 3085 points. The 3085 support is again crucial in the next couple of sessions. A fall past that will inevitably push the Sensex down towards the multiple bottoms at 2950. On the other hand, if the Sensex again rallies close to 3090 zone, it will register a bullish triple-bottom and indicate that support is actually moving up from 2950 which is hopeful long-term signal.