After the subprime issue which resulted in a strong downtrend in the world markets, it was now the turn of the Left to add fuel to the fire. The uncertainty created by the Left?s action could result in a bigger correction even as other markets around the world have started to move higher. There was a temporary respite to the stand-off with the Congress on Thursday and this could result in some improvement on Friday. Very few stocks have gone into a fresh intermediate uptrend on Friday and the indices will have to follow up in the early part of the next week to suggest that the intermediate uptrend has turned up.

The Sensex and the Nifty have been taking a good support at their 200 DMA?s and usually in a bull market this long-term moving average provides a good support to the intermediate correction. As the volatility in the intermediate downtrend has been large, we are seeing a sideways consolidation at the 200 DMA.

If the indices were to break out and move higher then we could see a start of a fresh intermediate uptrend and the end to the volatile decline. On the other hand, if the Sensex and the Nifty drop below last Friday?s low of 13,779 and 4,002, then it will mean the continuation of the intermediate downtrend.

A drop below these levels will also confirm a major downtrend as the indices would have closed well past their earlier intermediate bottoms. Thus the coming week will be quite crucial.

A few stocks have dropped into a major downtrend and if the indices drop below last Friday?s low, then more stocks will drop into a major downtrend confirming that the major trend is down. On the other hand, if we see more strength and a start of a fresh intermediate uptrend, then the major uptrend will be intact. The targets for the Sensex and the Nifty to go into a fresh intermediate uptrend are at 14,680 and 4,263 respectively.

The equivalent level for the CNX Mid Cap index to go into a fresh intermediate uptrend is at 5,856 respectively. The Sensex and the Nifty ended in green for the first time since July 24 as the Sensex and the Nifty each gained 2.0%. The CNX Mid Cap index ended 0.48% lower. Among the sectors, the BSE Capital Goods index was the largest gainer, ending 4.92% higher and was followed by the BSE Metals index which gained 4.74%. On the weaker side, the BSE Realty index was the largest loser, ending 3.37% lower and was followed by the CNX IT index which lost 2.65%.

As indicated in the last week, investors have to take a look at their portfolio and switch over from weak relative strength stocks to strong relative strength stocks. If the indices confirm an intermediate bottom at 200 DMA, strong relative strength will lead the next intermediate rise and will be the first to make new highs even as the indices and many other stocks lag. I will take a look at the capital goods sector which has been the leader in the current bull-run and continues to exhibit a bullish relative strength.

BHEL

BHEL has led the current bull-run and also the sector as the stock is already in an intermediate uptrend while the indices and most of the stocks have yet to confirm an intermediate uptrend. This is the sign of strong relative strength. Investors must look to book profits in weak relative strength stocks and get into a strong relative strength stock like this one. The weekly MACD histogram has made a higher intermediate top in the earlier intermediate top suggesting that the stock will soon follow suit. Investors must hold on to their long positions with a stop at 1540 and add to the long positions in case of any minor decline in the coming week.

Crompton & Greaves

Crompton & Greaves is another stock in this sector which continues to exhibit a good relative strength. The indices are taking a support at their 200 DMA while this stock is taking a support at the 50 DMA, which is much higher than the 200 DMA. This shows the strong relative strength by the stock. Again, the weekly MACD histogram for the stock has made a higher intermediate top in the earlier intermediate uptrend, suggesting that the stock will soon follow suit in the next intermediate uptrend. The relative strength line has been making new highs along with the stock and investors must hold on to the stock. Position traders can add to the long positions once the stock goes into a fresh intermediate uptrend.

ABB

ABB is also exhibiting a bullish relative strength, but the relative strength line has not made a new high in the last intermediate uptrend suggesting that there was some profit booking in the stock along the way as the stock made it to the new high territory. The weekly MACD histogram made new highs, but now, the MACD indicator has dropped below its trigger line indicating a loss of momentum. Investors holding the stock must keep a close watch on the stock in the next intermediate rise and see if there is a good improvement in the relative strength line. Otherwise, investors can look to book profits.

?For more details contact mayur_s@vsnl.com