Another black Friday as global meltdown in the equity markets resulted in the end of the intermediate uptrend. Since the past two weeks we were seeing that, though the indices were making new highs, few frontline stocks have been responsible for taking the indices higher, while the market breadth remained weak, suggesting that an intermediate correction was round the corner. This was confirmed on Friday as all the indices dropped well below their respective targets. The indices have already retraced about 38% of the earlier intermediate rise in one day and more of this is likely to be seen in the coming week.
The earlier intermediate bottoms by the Sensex and the Nifty are at 13,946 and 4,100 respectively and as long as the current intermediate downtrend ends above this level, the major uptrend is intact and so is the bull-run. The equivalent level for the CNX Mid Cap index is at 5,460 and for the Nifty Junior it is at 7,799.
The next important support zone for the Sensex is at 14680-14,720. The equivalent support level for the Nifty is between 4,245 and 4,362. These support zones will provide a strong support in the current intermediate downtrend.
All the indices except the BSE FMCG index ended in red. The BSE FMCG index ended 5.39% higher in the last week. The Sensex lost 2.13% and the Nifty ended 2.65% lower. Among the other sectors, the BSE Metals index was the largest loser, ending 5.81% lower and was followed by the BSE Bankex which lost 5.65%. The BSE IT index registered a moderate loss of 0.91%.
The trading volumes seen on Friday were pretty strong suggesting a big distribution day. Usually in a bull market we do not see more than a couple of days of heavy distribution in an intermediate correction. We will like to see if the indices are correcting with large volumes in the coming week and also it is important to volume action of the pivotals. Only if we see scores of days of a strong correction, the major uptrend will be threatened.
Also, in the coming week, we are likely to some consolidation or a minor rise within the intermediate uptrend. Do not try to pick up bottoms in the decline. Use the minor rise or the consolidation to liquidate long trading positions and look for short positions once the minor rise or the uptrend ends.
Most of the stocks have dropped into a fresh intermediate downtrend on Friday and it is too early for the investors to start picking up long positions in the coming week. However, they can look at a few sectors and stocks which look interesting. I will today take a look at the automobile sector which looks good and may have bottomed out recently. A higher intermediate bottom will be the best time to pick up long positions in this sector.
Maruti Udyog
Maruti Udyog has been exhibiting a weak relative strength line since the past one and a half years and has been oscillating about its 30 WMA. Currently, the stock has been staying below its 30 WMA but has been moving sideways below this long-term moving average and the strong resistance of 845. A close past 845 with a strong surge in trading volumes will mean that the major trend of the stock has turned up.
The weekly MACD histogram for the stock has been exhibiting a positive divergence indicating that the momentum indicators are favouring the stock to move higher and if the stock is able to make a higher intermediate bottom in the current intermediate downtrend, investors and traders can look for long positions in the stock.
Mahindra & Mahindra
Mahindra & Mahindra is in a major uptrend as the stock has closed past its earlier intermediate top in the last intermediate uptrend and will now have to exhibit a higher intermediate bottom to confirm the same. The relative strength line has been improving but has yet to make rising tops and bottoms to confirm that the stock has begun to outperform the indices. The weekly MACD histogram for the stock has been exhibiting a positive divergence and suggesting that the earlier intermediate decline was more due to inertia and a higher intermediate bottom by the stock will be the right opportunity for the investors and the traders to pick up long positions in the stock. Wait for the current intermediate correction to get over and pick up long positions only when the stock exhibits higher intermediate bottoms.
Tata Motors is in a major downtrend as the stock continues to exhibit descending intermediate tops and bottoms. The stock has been staying below its 30 WMA and has been exhibiting a weak relative strength. Like the other stocks discussed today, Tata Motors has been also exhibiting a bullish divergence on the weekly chart. The relative strength line remains weak and has been making new lows indicating that the stock is weaker than the other two stocks discussed today. Wait for the stock to form a higher intermediate bottom.