The P-notes action by Sebi has truncated the strong intermediate rise as the indices and scores of stocks have dropped into an intermediate downtrend. The indices have been trending strong since mid-August and were looking for some reason to correct. P-note became the reason for correction as the indices dropped sharply in the past three trading sessions and have wiped out more than six days of gains in this session. Thus the momentum on the downside is higher and we are likely to see more downside in the current intermediate decline.
The volatility has been very high in these three trading sessions and the declines have been accompanied by strong volumes. These are bearish signs suggesting that the bulls are booking profits and looking to exit. Declines with strong volumes are signs of distribution and if we continue to see more such distribution days in the coming week, then investors must be careful and look to book profits in the long positions that they are holding.
The intermediate downtrend is just two days old and will usually last for a couple of weeks. This means that the indices and the stocks are likely to see more downside in the current intermediate downtrend. Supports to the Sensex are at 17,120; 16,500 and 15,800 while the Nifty has supports at 5,080; 4,870 and 4,650. Watch the action of these indices at these levels in the next few weeks to see if the indices are forming some intermediate bottoms at these levels.
In the last week the BSE Reality sector was the largest loser, ending 8.35% lower and was followed by the BSE Capital Good sector which lost 7.13%. The Sensex lost 4.66% and the Nifty ended 3.92% lower. On the bullish side, the BSE Consumer Durable sector ended 0.84% higher and was followed by the CNX IT which gained 0.33%.
Like most of the sectors and the indices, the BSE Metals index has also dropped into a fresh intermediate downtrend. The relative strength line for the sector is still bullish, indicating that the stocks in this sector either falling at the same pace of the indices or at a lower rate.
The performance table for a few frontline metals stocks here will help investors to pick up strong metal stocks. The comparison has been done for 1 week, 4 weeks, 13 weeks, 26 weeks and 52 weeks. RP 4W means the relative performance of the stock to the Sensex in the past 4 weeks.
The base value in the table is 100 and any stock having a value of say 105 in the 4 weeks table means that the stock has outperformed the Sensex by 5% in the past 4 weeks. If a value of 92 is displayed in the 13 week column, it means that the stock has underperformed by 8% in the past 13 weeks. Also, the table will help you keep track of the performance of the stocks in the coming weeks.
Maharashtra Seamless was discussed by me a few times here and also when the stock was zooming higher. Last time when I had discussed this stock, I had already suggested that the relative strength of the stock was getting weaker and could be the first stock to drop into a major downtrend. Now, with the indices correcting, we are seeing many stocks also correcting and dropping into an intermediate downtrend.
Maharashtra Seamless has not only dropped into an intermediate downtrend, but also has dropped below its earlier intermediate bottom of 542, making a double top formation, which is a bearish sign and this means that the major trend of the stock is down.
The relative strength line for the stock has been falling sharply and this means that the stock has started to underperform the indices and is falling faster than the indices. Book profits in the long positions in such stocks.
SAW Pipes
SAW Pipes is another stock in the steel sector which has been exhibiting a weak relative strength. The stock has been underperforming the indices for the past few weeks and the current intermediate decline has resulted in the stock moving very close to its earlier intermediate bottom of 561.
A close below this level will mean that the major trend of the stock is down.
Also, a drop below 561 will result in the stock making a double top formation confirming a major downtrend. This will give the stock a minimum downside of 165 on the lower side.
Currently, the stock is at the 30 WMA which provides some support to the stock. If the stock is unable to hold on to this support, investors must look to book profits in the long positions.
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