Downturn may persist

MACRO TECHNICALS

The market saw extreme volatility and hit new all-time highs before going bearish on Thursday. By weekend, the Sensex closed at 5946.19 points for a loss of 2.83 per cent after hitting an intra-day high of 6248 on Thursday.

The Nifty hit a corresponding high of 2000 before closing at 1900.65 for a loss of 3.61 per cent. The Defty lost only 3.21 per cent as the dollar-rupee equation stayed favourable.

Breadth indicators were poor. The broad BSE 500 lost 4.45 per cent. Advances on Friday were outnumbered by declines in a ratio of 1:6.

Volumes were high, spiking to huge levels on Thursday and Friday. The Nifty put-call ratio has lifted from an extremely overbought 0.22 to around 0.37, which is neutral territory.

Outlook: We can obviously expect the market to fall somewhat further. But it's too early to diagnose whether this is a short-term or medium-term downtrend.

There are critical support levels at Friday's lows of Sensex 5914/Nifty 1888. Lower down, there are supports at Sensex 5870/Nifty 1850 and even lower at Sensex 5750/Nifty 1800.

If it's short-term, the market will rebound from the first or second level of support. Prices may even hold above Friday's lows though that is unlikely.

If there is a medium-term correction, the third support level will be tested. Through the last eight months, the market has rebounded from the 40-day exponential moving average after medium-term corrections. So that can be a benchmark. Current 40-Ema values are Sensex 5617/Nifty 1800.

Rationale: The market was extremely overbought and selling cascaded on Thursday-Friday. Momentum indicators are still trending down and haven't reached oversold territory in common indicators like the RSI, ROC or MACD. The market has broken below its own 10 Ema, which has usually been a good signal/support.

Counter-view: The selling was, as usual, triggered by FII action though it seemed to cause panic among other market players.

If the FIIs re-enter close to Friday's lows, that might be enough to reverse the trend. However, it seems extremely likely that there will be more sales before FII re-entry.

Bulls and bears: There have been losses across the board and small stocks have actually got hit harder.

The high volumes-large losses combination will be followed by erosion of liquidity in smaller/mid-range counters next week.

It's better to stay with large stocks. Among these, we can either look for defensive stocks that haven't been affected or we can aggressively seek stocks, which have been sold down to reliable support levels.

Among defensive sectors, private banks seem good - HDFC Bank, Indusind Bank and UTI Bank could defy the overall trend. Among major market makers, Reliance, ITC, Ranbaxy, Hero Honda and Tata Power are doing okay.

Other potential defensive stocks include ABB, Dabur, Glaxo, Thermax and Thomas Cook. Among cement shares, ACC and Gujarat Ambuja may be worth buys since both have dropped to supports.

Dr Reddy's and Satyam are two other stocks that seem to have hit reliable support. Unfortunately we can't recommend shorts except in the F&O segment.

MICRO TECHNICALS

DR REDDY'S
Current price: 1347
Target price: 1450

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The stock reacted to around 1325 before finding support. On the upside, rallies will probably terminate at around 1450, where it will run into selling pressure again.

However, the long-term trend looks very bullish. DRL is worth accumulating for the long-term at prices between 1325-1350.

Further support exists lower down till around the 1300 mark. Keep a stop-loss below 1300 and try and create a long-term holding.

ACC
Current price: 246
Target price: 256/240

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The stock seems to have hit reliable support at 245 levels. If there is further selling pressure, it should certainly hold at a lower support around 241.

On the upside, any rally will take the stock to around 256 or possibly even higher. Buy with a stop at 240. Be prepared to book profits around 256. Worth buying the February futures.

SATYAM
Current price: 324
Target price: 355

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The stock has been hammered down from recent highs around 390. It has excellent support between 310-330 and a likely target of 355 on a bounce.

It's worth buying the February future although that's running at a premium of 8. It's also worth buying the 330 January call (16) and selling 350c (9) because the resulting spread offers a good risk reward equation. Or simply go long, and keep a stop at 310.

THERMAX
Current price: 429
Target price: 440

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This is a purely defensive holding. The stock has been unaffected by the bearishness. It is continuing to trade sideways in a band between 420-440. Try and acquire the stock at the lower end of that band and sell if it rises to near the top.

UTI BANK
Current price: 157
Target price: 175

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The stock continues to display a bullish trend despite the overall correction. It broke out on Thursday from a sideways trading range of 135-155.

The likely target on this breakout is around 175. In practice, given the bearish conditions UTI Bank might not achieve that projection or it may take a fair amount of time. Take delivery and be prepared to hold until 170 levels at least. Keep a stop at around 145.

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