Sniffing the oversold zone

TECHNICALS

The markets opened on a flat note yesterday, and saw a see saw gyration of 7.5 per cent on an intra-day basis, before settling down with 3 per cent losses.

The traded volumes were higher than the 10-day average and the highest in recent times.

The market breadth was outright negative as the ratio of advances to declines on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) combined stood at 565 : 2187.

The capitalisation of the breadth was also negative as the figures on the two exchanges taken together stood at Rs 1,333 crore : Rs 9,563 crore.

This paints a very bearish picture as the markets have been sliding with high volumes and bull unloading.

The derivatives data available for Wednesdays session shows an across the board selling on index heavy-weights which exerted a high downward pressure on the markets.

The indices have now sunk to below their 30-day SMA's and the rally, which commenced from November 2003, has seen a 50 per cent correction on the indices.

The markets are showing signs of a selloff climax and the short-term momentum oscillators are getting into the oversold zone and that raises the possibility of a corrective relief rally.

The minor support on the downside should be seen at the 1744 and 5480 on an intra-day basis on the Nifty and the Sensex, respectively.

Should the indices trade below these levels consistently, expect a fresh fall of 2 per cent in the near term.

On the higher side, expect intra-day resistance at the 5710 and the 1822 levels. It should be noted that though the chances of a relief rally are high, the upmove will be a temporary spike and nervous bulls are likely to utilise the rally to exit from long positions.

The outlook for the markets on is Friday that of abundant caution as the initial part of the trading session will see a spillover of the previous session's selling pressure and nervous bulls are likely to surrender positions if the markets show signs of further weakness.

Upmoves due to short covering should be expected as the bears have made a killing in the last few sessions and the impeding expiry of the January derivatives series will see a squaring up of short positions too.

I would advocate abstinence from intraday trades unless one is a savvy trader and understands the dynamics of the markets. Trades initiated if any, should be on very thin volumes and strict stop losses should be enforced.

Vijay L Bhambwani
CEO - BSPLindia.com

The author is a Mumbai-based investment consultant and invites feedback at vijay@BSPLindia.com or (022) 23400345 / 23438482.

Sebi disclosure :- The analyst has no exposure to the scrips mentioned above.