Markets: Short-term recovery likely but...

As everybody knows, the market went through a bloodbath this week. In statistical terms, the Sensex fell 11.96 per cent to close at 10938.61 points.

The Nifty did marginally better to close at 3246.9 points for a loss of 11.04 per cent. The Defty lost 12.1 per cent because the rupee reacted to a dollar rate hike.

The Sensex's Rise & Fall: Complete coverage

Breadth signals were bad to put it mildly. Declines outnumbered advances by over 12:1. Volumes did not drop along with the market  - this is a danger signal since it suggests that there is still supply in the market. The BSE 500 was down 11.73 per cent.

Outlook: In the short term, the market should find support somewhere between 3175 and 3250 (Sensex 10750 and 10950) - that is, very close to current levels. But we're obviously in a strong intermediate downtrend that started 7 sessions ago.

So, further losses may be on the cards during the next two months. This move has been so strong that it could also mean an end to the long-term bull market.

Rationale: Most daily momentum indicators are heavily oversold. That makes a short-term recovery likely.

But there is a pattern of lower tops (3774 on 11/5/2006 followed by multiple tops @ 3640 on 15/5, 17/5, 18/5) and lower bottoms (3382 on 16/5 and 3205 on 19/5). This means an intermediate downtrend, which could last up to another 10 weeks.

It's impossible to diagnose if the long-term trend has reversed. The indices are still well above their respective 200 DMAs and reversal confirmation would require two things one, the indices must drop below the respective 200 DMAs and two, on the next intermediate uptrend, they should fail to clear respective (record) highs of 3775 and 12671. One way or another, we won't know for a while.

Counter-view: If enough number of people believe the bull market is alive, we may just see a comeback in terms of sentiment next week. For the intermediate trend to go bullish again, we need a rise above 3650 (Sensex 12300) on substantially higher volumes. As of now, this doesn't seem likely.

Bulls and Bears: That should really read "Bears and more Bears", given the absence of bullishness in the market.

A short list of stocks appears to have bottomed and seems capable of holding value through the next few weeks. This includes Bajaj Auto, Dabur, HDFC Bank, Mahindra & Mahindra, Wipro and NTPC.

A long list of stocks seems set to lose more ground. The front-runners for shorts would include Bhel, Bharat Forge, Tata Motors, Jet Airways, Maruti, ONGC and Siemens. Metal stocks such as Hindalco, Sterlite and Nalco look dangerously exposed despite the big losses they've incurred.

As and when the next phase of bullishness starts, I would expect IT and pharma stocks to be among the best performers.

Micro technicals

Bhel

Current price: 1976
Target price: Expected 1850,
Upside risk: 2030

The stock has made a downside breakout on high volumes. It has a projected target of 1850 and there's also support visible at that level. Keep a stop at 2030 and go short. Start covering below 1875.

Bajaj Auto
Current price: 2949.25
Target price: Expected 3100,
Downside risk: 2875

The stock has primary support at 2940, excellent secondary support at 2875 and a possible upside till 3200 on the rebound. Go long, with a stop at 2940 and cover above 3075. If it drops below 2930, go short with a stop at 2940. Cover at 2880.

Sterlite

Current price: 405
Target price: Expected 350,
Upside risk: 440

The stock made a downside breakout closing below 435 on Thursday. It has a projected downside of around 350. Keep a stop at 440 and go short. Start covering below 465. If it does climb back over 440, the stock could jump till 490. In that case, be prepared to reverse the position.

Tata Motors

Current price: 844.8
Target price: 785,
Upside risk:865

The stock dropped out of a trading range when it closed below 885. It has a projected downside target of 785. Keep a stop at 865 and go short. Cover below 790.

Wipro

Current price: 487
Target price: Expected 540,
Downside risk 445

The stock seems to have found decent support at the current level which is at the bottom of a trading range it has traversed over the past four months. It could rebound till 540 quite easily.

However, if Wipro falls below 480, it would made a decisive downside breakout with a likely target of 445. Go long, with a stop at 480. If it closes below 480, go short with a target of 445.

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