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Home > Business > Business Headline > Report


Sensex @ 7200: What experts say

December 13, 2004 13:04 IST
Last Updated: December 13, 2004 15:53 IST


Technical analysts predict short-term corrections followed by a period of consolidation. But long-term outlook is bullish.

6669 in two quarters

Hemen Kapadia, Partner, Morpheus Inc (investment advisory)

Outlook

At present the Sensex is in a medium-term, long-term, long-long-term uptrend but there is a short term pressure. Currently we are in the midst of what is turning out to be the greatest bull market in Indian history and it doesn't seem to be in a mood to stop in a hurry.

Also read
Sensex may touch 7200 in a year

The near-term picture is obviously bullish and the sequence of higher tops and higher bottoms continues. Since we are already at Sensex's all-time high, there aren't any known resistance levels.

The outlook for the month remains bullish with some caution thrown in for good measure due to the anticipated profit-taking at higher levels. To maintain this positive trend, the Sensex needs to remain above 6230, 6151 and 6084 levels (in that order) while a near-term closing above the 6361 level could signal a further upside.

The target for the Sensex is 6669 in the next two quarters while a breach of the 6166 level would negate the validity of the aforesaid target. The Sensex is moving in a perfect upward-sloping channel and as long as it continues to move within the confines of this channel, the intermediate trend can be considered to be up and intact.

Weekly mechanical indicators like the moving average convergence divergence, relative momentum index and relative strength index (see box for definitions) are clearly reflecting negative divergence, which would serve as a premonition of a bigger correction in the current upmove when it exhausts itself.

This phenomenon of negative divergence is a classical accompaniment of the 'fifth wave' (upward, according to the Elliot Wave Theory). Tentative targets for the fifth wave could be in the range of 6800-7200 in the next three quarters, which would be followed by a minimum six-month correction timewise with a pricewise magnitude of approximately 1500 points from this anticipated top.

The Nifty is also very much expected to do the same while there is a mild discrepancy in the form that despite the Sensex posting a new all-time high the Nifty hasn't yet breached its all-time high which is due more to the frequent changes in the composition rather than anything else.

Top five picks

Mahindra & Mahindra: The scrip is on the verge of giving an upward breakout from a 10-month consolidation phase while is in the midst of a superb long-term uptrend. Target price for the next 12-18 months are Rs 650 and Rs 800 and a stop-loss at Rs 456.

Grasim: The scrip is due to resume its long-term uptrend in the form of a fifth wave (read as impulse and upward). Target price for 12-18 months are Rs 1,500 and Rs 2,100 and a stop-loss at Rs 1,147.

Wipro: The scrip has exhausted its four-and-half-year correction and has given an upward breakout from a rectangle pattern, indicating the onset of a long-term uptrend. Target price for the stock are Rs 1,000 and Rs 1,400 with a time-horizon of 12-18 months and a stop-loss at Rs 680.

Assam Company: The scrip is coming out of a eight-year rounding bottom (read as saucer pattern), setting the stage for a sizeable upside from here. Target price for the stock are Rs 85 and Rs 140 with a time-horizon of 12-18 months and a stop-loss at Rs 30.

Ravalgaon Sugar: The scrip seems to have ended a 10-year bear market by giving an upward breakout from a symmetrical triangle formation, indicating its intention to commence a long-term uptrend from these levels. Target price for the stock are Rs 7,000 and Rs 10,000 with a time-horizon of 12-18 months and stop-loss at Rs 3,700.

No cap on mid-caps

Milind Karandikar, Neowave analyst

The recent market action has proved that psychological trends are so powerful that they change only with time and not with fundamental news. The present bull trend set in the minds of people has withstood all the bearish news like soaring crude oil prices, rising rate of inflation and deficient monsoon.

I have always noticed that trends are set first in the minds of people, affecting the market indices immediately, the economy much later. For many, it is difficult to understand these trends without fundamental reasoning. Trends in the economy always follow those in the stock markets and not vice versa, as many may believe.

That is why at the beginning of a new trend or close to the reversal of an established trend, fundamentals create a contrary opinion.

Many investors, therefore, lose money by buying stocks near their highest prices or lose good stocks by selling them near their lowest prices. In other words, they can't find anything wrong with the economy when the bull market is about to end, or anything good when the bear market is on the verge of reversal.

Technical outlook

The present bull trend is expected to reach a minimum target of 2730 on BSE 500 (Sensex 6638, Nifty 2079) in about a month's time, after which a sharp correction can be expected. After the target of 6600-6900 is achieved the market should remain range bound (500-600 points) for five to six months.

Once this consolidation phase is over, another strong bull phase should take the market to 8000 plus levels on the Sensex by the end of 2005/beginning of 2006.

Investment perspective

After a long consolidation phase of about 11 years, the markets are set to make new highs and enter a new zone of trading activity. One must have observed that almost every sector has participated in this bull run that began in May 2003, unlike all the preceding rallies from 1992 to 2003.

Therefore, this phase appears to me as an intermediate phase of a very powerful bull market, which shall project Indian economy as one of the strongest by the middle of the 21st century. If the US economy is going to grow 10 times in the next 25-30 years, probabilities are high that the Indian economy will grow 40 times.

The sectors, which according to me, seem to be have tremendous growth potential are given below. Though I have mentioned some names, many of the mid-caps from these sectors are looking so promising that they might turn into large-caps.

  • Banking: HDFC Bank
  • Construction: Jaiprakash Associates
  • Auto ancillaries: SKF Bearings
  • Cotton textiles: Arvind Mills
  • Power: Tata Power

Unprecedented highs

Salim Dawoodani, Research consultant, Darashaw & Company

Currently, the Sensex is trying to absorb selling pressure emerging at the 11-year rising trend channel.

Breakouts from rising trend channels often result in acceleration of the upmove. And if the trend channel is over a decade old, the resultant rally could be a long and secular one. Thus, on completion of a conclusive breakout from this trend channel, the Sensex may scale unprecedented highs.

During the coming year, the Sensex may try and test this supply line. I expect the Sensex to attain a level of around 7200 during the next one-year.

There could be some volatility and bouts of weakness in the interim period. On the downside, the level of 5565 is a critical support level.

Top picks

Among sectors, I feel textiles, cement and pharma -- particularly MNC pharma -- may outperform. Capital goods may continue its good run. FMCG could be the dark horse.

Among scrips, Bombay Dyeing, ACC, Grasim, GlaxoSmithKline Pharma, Dr Reddys, ITC and Ranbaxy may outperform. I expect a minimum 40 per cent appreciation in these stocks from current levels, while downsides could be limited to 10 per cent. Preferably buy on declines. From among the mid-cap bunch, a new set of scrips may become flag-bearers and register explosive moves.

Short-term correction due

Deepak Mohoni", managing director, trendwatch.com

Outlook

The Sensex and the Nifty have been in intermediate uptrends since October 26 when the Nifty hit a low of 1,750 and the Sensex 5,558. This makes the uptrend over seven weeks old, and therefore quite mature.

Though such uptrends have sometimes even lasted three months during strong bull markets, the odds are weighted in favour of a correction sometime soon. It would be reasonable to expect that we should be in such a correction at the end of a month, though a very strong bull run can never be ruled out.

Recent bull markets have rarely lasted over a year; so unless this is a very extraordinary phase we can expect a bear market correction to start sometime in the next few months. A fall below 5,558 (the Sensex) would be required to signal an end to the bull market. The Nifty equivalent is 1,750.

A one-year timeframe is too unpredictable as there will be many unpredictable fundamental and economic factors which will change trends.

Stocks picked on the basis of a strong finish in an otherwise weak Friday market - Alembic (stop-loss 232), Nahar Spinning (stop-loss 226) and Trent (stop-loss 545) - with a short-term perspective. Use trailing stops to book profits.

Consolidation is likely

Vijay Bhambwani, CEO, BSPLIndia.com

Outlook

The outlook for the coming 30 days on the BSE Sensex and the Nifty is that of consolidation. The lower side will see support at 1860 on the Nifty in a worst case scenario and 5950 on the Sensex in a similar outright bearish scenario.

The upsides will see resistance at 2025 and 6544 on the Nifty and Sensex respectively. The indices are near their all-time highs and need to surge higher with very high volumes to be able to sustain the upward momentum.

The three-month outlook is somewhat more optimistic as the markets will see a pre-Budget build-up of positions and higher levels. The support levels on the downside, will be at 5875 and 1840 on the Sensex and the Nifty respectively and the upsides will be capped at 6770 and 2085 in a bullish scenario.

The six-month outlook is unlikely to change much from the three-month outlook as the post-Budget market consolidation may see little variation from the pre-Budget build-up.

The upsides will see 6800 and 2090 levels on the Sensex and the Nifty respectively in a bullish scenario and 5925 and 1820 in a bearish scenario.

The one-year outlook is vastly improved as the upsides are likely to see 7250 and 2220 levels on the Sensex and the Nifty respectively, with the downsides being limited to 5700 and 1780.

The important point to note here is that the indices have been making higher tops and bottoms formations in time and therefore, with the passage of time, the lows have not changed much, but the higher target prices are being revised significantly higher.

Top picks

TCS: Going by charts TCS is one of the strongest scrips with a textbook style higher tops and bottoms formation. The scrip is a market out-performer and has a very high relative strength reading. The six-month target price is Rs 1,500.

ACC: The scrip is making new highs and has achieved the highest closing recently. Currently trading at 12-year highs, the stock has the potential to make new highs in the next six months with a target price of Rs 375.

Mahindra & Mahindra: The scrip is another market out-performer with a very high relative strength and is on the threshold of a breakout into a life-time high. The six-month target for the scrip is Rs 600 level.

Ranbaxy: This stock is already into a new trading zone as the prices are at all-time highs. The scrip may see consolidation in the coming future with the six-month target of Rs 1,450-1,500 being a distinct possibility. The scrip has a very high relative strength and outperforms the Sensex and the Nifty by a wide margin.

GlaxoSmithKline Pharma: Another pharmaceuticals story and a rank outperformer of the markets. The scrip is witnessing consolidation at the present level with a bullish undertone as the long-term charts show a rising tops and bottoms formation being intact.

Top sectoral picks in the order of preference are pharmaceuticals, technology, auto ancillaries and cement.


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