Market Technicals - Feb 4 2008

The market weathered the settlement and seems to have settled into a phase of consolidation with support just above the 200 Day Moving Average. The Nifty closed the week on 5317.25 points with a loss of 1.22 per cent while the Sensex was down 0.69 per cent at 18233 points. The Defty lost 1.12 per cent as the rupee strengthened.

Breadth was poor with more declines than advances. The Junior was down 4.46 per cent. The FIIs continued their unabated selling. The Midcaps was down 3.77 per cent and the BSE 500 was down 2.08 per cent. Volumes dropped drastically- even settlement didn't bring action to the market.

Outlook: The 200 DMA has held through this traumatic period when the FIIs sold over Rs 17,000 crore. Assuming that there isn't another wave of FII exits, expect the Nifty to swing within a range of 5000-5500 with high daily volatility and low volumes. The intermediate trend is negative, the short-term trend is positive and tentatively, the long-term trend may still be bullish.

Rationale: The 200 DMA is a key lagging indicator of the long-term market trend. Since the major indices have held above this level after testing it, we believe that the long-term trend is probably intact. In the short-term, the short-covering on Friday could continue and drive the Nifty back to levels of around 5475-5525.

Counter-view: This downtrend was triggered by FII selling that led to cascading margin calls for leveraged Indian retail players and operators. If the FIIs continue to sell, there is no counter-party capable of absorbing that. Closes below the 200 DMA (Nifty 5075) would signal a worsening trend. Closes below 4900 would confirm a long-term bear market. This is a distinct possibility.

Bulls & bears: Banks were hard-hit this week because the RBI refused to make rate cuts that were expected. The BankNifty dropped a disproportionate 4.4 per cent. If there's a sectoral bounce, expect ICICI, Indian Overseas Bank and Yes Bank to lead the way.

Conversely, the CNX IT gained 3 per cent due to expectations that the rupee would weaken due to FII outflows. Practically every stock in the sector rose. Unfortunately this may not be sustainable. The best picks appear to be Satyam and HCL Tech.

Among other stocks, there was a bullish flavour to the auto industry, which has seen a sell off through the past 6 months. Bajaj Auto, Hero Honda, Maruti and Tata Motors all participated.

Otherwise, there was some buying scattered across BPCL, Airtel, Cipla, HDFC, NTPC, ONGC, Tata Power and Tata Steel. The Reliance and ADA group counters remained depressed but most are at levels, which will attract investment buying.

MICRO TECHNICALS

Bajaj Auto Current Price: 2449.35 Target Price: 2400, 2525 (Range-trading)

The stock is testing a critical resistance at current levels. If it crosses 2460, it could rise till the 2525 level. On the downside, there is support at 2410. Expect daily swings through a range of 2400-2525. If 2400 is broken, the next support is at 2360. Use 2450 as a pivot and go long or short depending on whether the stock opens above or below 2450.

Cipla Current Price: 196.4 Target Price: 210

Cipla hasn't generated high volumes but it has gained consistently over the past 6-7 sessions. There's room for the stock to appreciate till the 210 level before it runs into stiff resistance. Keep a stop at 191 and go long.

NTPC Current Price: 205.7 Target Price: NA

The stock appears to have bottomed out after heavy selling. It has a potential upside till 225 with a timeframe of about 15 sessions. Keep a stop at 196 and take delivery. Book profits above 225.

Reliance Petroleum Current Price: 167.8 Target Price: NA

The stock seems to have found a reliable bottom with support at 155-165. There's a potential upside till the 185 level. Keep a stop at 163 and go long. If the stop is broken, go short with a target of 154 and a stop at 167.

Via Business Standard