Market Turns Down Again

The market made another Southward lunge with the bearishness being spearheaded by selling pressure on ICE stocks. Yet another downtrend in the Nasdaq caused a crash across Asian bourses. The Sensex ended close to its lowest value of the week at 4107.14 points. This was a loss of 12.51 per cent, which is huge by any standards. The Nifty mirrored the sentiments with a loss of 9.7 per cent. The Dollex lost 13.35 per cent while the BSE200 lost 12.8 per cent. The rupee dropped below 44 to the greenback.

The background signals were also quite bearish suggesting that the last advance was a "dead cat bounce". Volumes were noticeably lower than in the previous week. The ratio of advances to declines was extremely negative with only 348 stocks rising, while 1018 stocks declined.

 

The market has landed very close to the intra-day low of 4109 on May 3, and this could be considered a double bottom. There is powerful support here across a historical period of 3 years so a rise on Monday would not be unexpected. Overbought/ oversold oscillators like the RSI and the ROC are extremely oversold in both daily and weekly charts. This is another support signal that suggests that the downtrend may be temporarily arrested.

But the lack of volumes and general apathy of sentiment suggests that any rise will be merely a technical reaction and not a genuine trend reversal. There is a Fibonacci time-signal, which suggest a possible temporary bottom in this week. The intermediate trend has been negative since February 21 with a pattern of lower tops and bottoms. So this first downtrend in a new bear market may now be mature since it has been in force for 10 weeks. Intermediate trends rarely last more than 12 weeks without some reaction.

However with the market so firmly stuck below its own 200 Day Moving Average and short of upside triggers investors had better be preapred for the long haul. An Elliot-Neely wave-theory analysis also suggest that the current downtrend will be quite severe in terms of retracement.

I would expect the market to dip to around the 3800-3900 zone at least, before it finally bottomed in this bear market. A dip of some 300 points is relatively small at around 8 per cent off current values. But the key question here is the turnaround time. It is perfectly possible for a market to go nowhere and drift for years without necessarily losing much value. This hurts the investor even more than a steep plunge because of the loss caused simply by compounded cost of carry.

Time zone calculations are notoriously tough to make, and prone to errors. In broad terms, a long-term bull market should exceed the subsequent bear market reaction in terms of both time and movement. So, the upper time limit on this bear market is 15 months since the last bull market lasted from November 1998- February 2000. While there are time zone signals suggesting that a reversal is possible as early as mid-June itself, that would be an unusually short duration. There are plenty of more likely looking reversal points in the last quarter of calendar 2000.