On The Way To Broad Gauge

The market appears to be in a consolidation phase, but the current narrow range is unlikely to last long

Market wrap: The market drifted lower through the week, primarily because of a total lack of institutional buying interest. The Sensex ended down 2.09 per cent at 3242.75. The Nifty was down 2.13 per cent at 1062.55 and the Defty lost 1.95 per cent as the US dollar weakened.

The broad-based BSE 500 was down two per cent with other breadth signals turning negative. Volumes declined through the week and declines outnumbered advances considerably. The Put-Call ratio shot up to 59 around the middle of the week before declining to 51, which indicates an oversold market.

 

Outlook: The market is seeing persistent support at 3220 (Nifty 1055) and moving within a narrow range, with resistance at the 200-DMA around 3275. This seems to be a consolidation or continuation pattern inside the intermediate trend. Indian FIs and FIIs have been net sellers through the month. It's extremely difficult to make a call on the future direction, but a range this narrow cannot last for too long.

The drop below the 200 DMA is a bearish signal; so are the poor breadth signals. A breakout below 3225 will probably push indices lower to around 3150-3175, maybe ever down to 3120 (1020-1030 levels). But a rise above 3280 should lead to targets around 3450 (1120).

RATIONALE: The market appear to be oversold but there could be more selling on fears that UTI may be about to offload huge chunks of shares in the market. There has been strong interest in penny stocks through the last fortnight and that is usually a sign of unsustainable small-investor participation. The lowering of mandatory PAN reporting limits is likely to hit this segment. On the other hand, we could have institutional bargain hunting kicking in. But a downside movement seems more likely.

COUNTER VIEW: If there is indeed interest from "value hunters", the market could turn sharply higher. Despite the poor conditions of the last week, there are serious possibilities of an intermediate uptrend. In that case, we should see 3450.

BULLS AND BEARS: There are some developing trends. Several pharma stocks are down, including Cipla, DRL, Glaxo. Bigger IT stocks such as Infosys, Satyam, Wipro and Zee seem to have bottomed out and may be worth accumulating at these prices. Smaller IT stocks such as Mastek and Trigyn are weak.

LOOK WEAK: PSU prices remained neutral or bearish. Among banks stocks, ICICI and Oriental Bank came under selling pressure, and that might continue. Lower-priced Tata stocks such as Tata Chem, Tata Finance and Tata Tea are seeing accumulation. GE Shipping has seen huge investments in the past week and so have LIC Housing and LML.

Last week's suggested trade of +1100 June Nifty Call and + 1060 June NiftyPut would have gained, though the position has not been triggered. The 1060 Put premium has appreciated (from Rs 6 to Rs 18.50) to compensate for losses in 1100 Call (from Rs 7.50 to Rs 1.50). Take profits.