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Markets: Near-term looks bearish

Devangshu Datta | December 20, 2004

The major indices performed double-tops last week indicating bearishness in the short-term.

The market spurted to new all-time highs. The Sensex hit a top of 6437 points before closing at 6346.48 points for a week-on-week gain of 1.81 per cent.

The Nifty hit a high of 2039 points before closing at 2012.1 for a corresponding gain of 2.19 per cent.

Breadth signals were mixed by the weekend although they were more positive in mid-week. The ratio of advances to declines was clearly negative by weekend.

However volumes remained decent through the week. The Nifty put-call ratio dipped to a neutral 0.37 from oversold levels of 0.5. The broad BSE 500 was up 2.71 per cent.

Outlook: The major indices performed double-tops on Wednesday and Friday. This is a short-term bearish signal. It was backed by the candlestick pattern of the last three sessions. Hence we could see a reaction to the strong support at Nifty 1990/ Sensex 6275.

Rationale: Even in a major bull run, there will be bouts of profit-taking and retraction. Momentum indicators such as the 10-day Roc and 14-day RSI are in sell mode and showing negative divergences by executing lower tops while the indices hit higher tops.

However the intermediate trend and the long-term both appear to remain positive. Trend-following indicators such as Moving Average systems and the MACD are positive across all timeframes.

Counter-view: Negative momentum divergences can sometimes prove to be very powerful lead indicators. The RSI and ROC both going bearish inside a bull run could mean that we have hit a major top.

But during extended trending moves, momentum indicators can also produce false divergences. Don't trade against the major market trend until and unless the price switches direction to confirm indicator divergence.

Bulls & Bears: Three sectors showed strong upwards movement. One bullish industry was pharmaceuticals where stocks like Aventis, Cipla, Hoechst, Nicholas, Novartis and Pfizer continue to look bullish despite the Friday pullback.

Another hot sector was cement where Grasim and Madras Cement appear the most likely to produce exceptional returns. But the standout sector was banks where an amazing rally continued.

Relatively smaller stocks such as City Union Bank, Bank of Rajasthan, Bank of Punjab, Federal Bank, Indusind Bank, Karnataka Bank, Karur Vyasa, The South India Bank, ING Vyasa Bank all saw stratospheric gains backed by massive volumes. The list of other stocks that did well included ABB, Cadilla Healthcare, Container Corporation, Saregama, Sesa Goa, Tata Power and Tisco.

Micro Technicals

Aventis Pharma

Current Price: 1244.95

Target Price: 1500

The stock has a smaller float than Nicholas Piramal, which could mean that prices will rise more sharply in a bull run when supply outstrips demand. Otherwise, Nicholas looks just about as good in terms of most technical indicators.

The short-term target is difficult to judge; the stock has made a major breakout in the last two sessions.  The long-term target is 1500-plus. Keep a stop at 1150 - the wide range is a consequence of the recent breakout.

Federal Bank

Current Price: 151.35

Target Price: 160, 175

One of many bank stocks, which have made a concerted upmove. The priceline has risen less violently than with some other banks. Hence future movements are somewhat more predictable. The stock has risen on high volumes and broken a key resistance at 150. The short-term target ought to be 160. In the long term, it could reach 175. Keep a stop at 142.

Grasim

Current Price: 1269.75

Target Price: 1310, 1500

The stock has hit an all-time high on expanding volumes. The short-term target should be in the range of 1300-1325. The long-term weekly charts suggest that this move could go much further. A bullish long-term formation was completed last week with a breakout past 1230. The long-term target could be around 1500. Keep a stop at 1225.

IndusInd Bank

Current Price: 54.25

Target Price: 68

This is another stock where a glance at weekly charts helps clarify targets. The stock is in a strong uptrend but targets aren't easily generated from daily charts where the price is moving up with support along a trendline of 45 degrees. On weekly charts, Indusind has completed a bullish saucer by crossing above 53.5. The long-term target is 68. Keep a stop at 53.

Saregama

Current Price: 128.35

Target Price: 145, 175

The stock has surged from 85 levels within the last five sessions with massive volumes. In the short-term, the stock has a target of 145. Keep a stop at 105. In the long-term, the target is about 175. There is higher than average risk because of a history of consistently hitting circuits.

Tata Power

Current Price: 370.65

Target Price: 395

The stock has moved up to an area of severe resistance. The likeliest short-term pattern is range-trading between 370-395. However if the stock does close above 395, it would complete a pattern with a target projection of 550. Go long, book profits at 390, be prepared to buy again if it closes above 395. Keep a stop at 360.

The target price and projected movements given above are in terms of the next five trading sessions unless otherwise stated.


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