Setting Free The Bears

Trading this week could hardly be considered representative with two sessions lopped off due to Republic Day and Id. But the market continued to weaken and optimists weren't in evidence. The Asian crisis continued to form the backdrop while elections equations moved to centrestage.

Call money rates came down somewhat. But the long term effect of higher CRR and bank rates coupled with the short-term effect of RBI dollar sales and rupee buys must be shrinking liquidity. Industrial recovery will be adversely affected in the longer term while it has had an immediate impact on financial assets. The rupee may have actually got the worst of both worlds. It has depreciated enough to panic FIIs, while not falling enough to create export competitiveness. In fact, it has appreciated against most Asian currencies.

 

The market hit several successive 52-week lows. The Sensex dropped to 3276 points on Tuesday. On Wednesday, it hit 3209.55 points. Thursday saw the Sensex hit an intra-day low of 3164 before pulling back to close at 3224.36. The Sensex lost 3.79 per cent this week while the Nifty closed at 941.35 points on Thursday, off 4.58 per cent. Volumes spiked up on Wednesday and Thursday as FIIs dissolved their holdings. Indian FI buying was too sporadic and cautious to reverse the trend.

The background indicators continued to be bearish. The ratio of advances to declines saw 283 scrips gaining while 749 scrips dropped. Trading was concentrated purely on large caps. Other indices such as the dollex-BSE200 twins showed 4.83 per cent and 4.10 per cent losses respectively. The Asa Allshares Index of 3500 scrips went down by 2.45 per cent and is now trading 9 per cent down from its 1990 base. The BS Midcap-100 and Midcap -250 lost 2.57 per cent and 1.85 per cent respectively . The BS Smallcaps remained unchanged due to a total lack of quotes.

The short-term trend may have shown signs of recovery when it pulled back on Thursday from 3164 points. However the intermediate and long term trend are both down. The Intermediate trend duly registered a confirmatory lower bottoms pattern when it breached 3247 points. It had earlier shown lower tops when it peaked at 3480 versus a previous peak of 3738. The intermediate trend has been down since January 7. Empirically, intermediate trends can live for up to 12 weeks so this one may reverse only a new government is installed.

By definition, it will show up with successively lower bottoms while it is in force. So, the support at 3150 which responded on this occasion may be breached in the next short-term downtrend. An intermediate trend reversal will only happen if the market rallies above 3480 points.

The long term trend has been down since August and long term trends can stay in force from six months to three years. The last bull market lasted nine months (December 1996- August 1997), the last bear market lasted from September 1994- December 1996.

This one could terminate earliest around March 1998. There is room for people to get more pessimistic in the interim, but Indian long trends have been getting shorter. Mainly because FIIs organise their trading on quarterly perspectives. There haven't been any technical signals of positive divergence though, so we must simply wait. Selective long term buying looks like an excellent bet however.