Market Responds To Sinhas Sops

Is the market really irrational? The Finance Minister believes it is and has gone on record saying so. Yet, consider the fact that the market was disappointed with the Budget - specifically with the fact that ESOPs were still being irrationally taxed and also with the withdrawal of various tax shelters for pharma and IT. It showed an immediate decline on those grounds. Between February 28 and early last week, the Sensex lost sharply. Then Sinha cleared the concessions and announced them as a special package. And viola, the Sensex gains almost 600 points immediately. That isn't irrational behaviour even if it is exuberance.

 

Anyway, the BSE Sensex closed this week at 4693.88 points after hitting an intra-day low of 4109 with a weekly gain to the tune of 0.78 per cent. The S&P CNX Nifty gained 1.12 per cent. The Dollex lost 0.44 per cent this week, while the BSE-200 lost 0.48 per cent. The BSE-500 lost 0.27 per cent.Unfortunately there was a problem with Friday's BSE data so it wasn't possible to run all the usual breadth tests. But it does appear that the bullishness is still restricted to the pivotal counters. Trading volumes were low on Wednesday and Thursday when the market gained strongly after hitting the low of 4109. The volumes may have improved on Friday.

A look at the charts suggest some interesting conclusions. The Sensex is now moving on to a zone of increasing resistance. Anywhere above 4750 runs into previous trading congestion and selling pressure. At around the 4900 level, the 200 day moving average (DMA) would cause more resistance. The 200 DMA is always an important benchmark of a long-term market trend. Above the 200 DMA would be bullish, below would be bearish and a crossover is important.

On long-term weekly charts however oscillators like the 14 week RSI and 14 week ROC have both bottomed and started to move upwards. This is a good signal which suggests at least a temporary improvement in trend. However long-term weekly indicators quite often lead the price by significant times - upto 2 months or more.

Another good background signal is that liquidity remains high. Call money rates dropped on a reporting Friday last week. Rising inflation implies lower real interest rates in general. So the revival may continue. This would only occur if volumes above the 4750 level are high enough to overcome resistances between 4750-4900 level. Sometime in the next fortnight, the breadth indicators will also have to catch with more stocks participating in the revival. There is a Fibonacci time signal that suggests a possible reversal of the bearishness around June 10, 2000. If that is missed, then the next time-window is in late July. Another positive Fibonacci signal is that support at 4109 came more or less on the 0.618 ratio of retracement projected on the move between 2742 points in November 1998 and 6150 points in February 2000. So it is possible that the market will indeed see a swift end to the bearishness.