Cash is where the banks are

Written by Mayur Shah | Updated: Jan 27 2008, 06:28am hrs
A highly volatile week, the indices first dropped below their earlier intermediate bottoms and than saw a sharp reversal from mid-week as they retraced 50% of the earlier intermediate decline. The Sensex and the Nifty have closed well below their earlier intermediate bottoms, suggesting that the major trend is down while the CNX Mid Cap index has done so on an intra day basis. It will have to close below 6,462 to confirm that the major trend is down. The indices saw a strong decline in line with the major indices around the world.

Majority of the frontline stocks have dropped below their earlier intermediate bottoms indicating that the major trend is down. In the past, major downtrends have lasted for six months or more indicating that we have seen a major top for some time to come. Now, either the indices will have to consolidate at lower levels and make a new base before they again move back into a major uptrend or they continue to exhibit descending intermediate tops and bottoms for some time before they again start a major up move later in the year.

The Sensex will have to move past 21,207 and the Nifty past 6,357 in the current intermediate rise if these indices have to reinstate the major uptrend. Otherwise, we are likely to see more consolidation and base building at lower levels due to the sharp decline and will move into a major uptrend later in the year.

The current strong volatile conditions will not make it possible for the indices to make new highs. The Sensex and the Nifty are currently at the 50% retracement level and the next important resistance for the Sensex is at a gap between 18,920 and 18,930. A close past this resistance will result in the Sensex heading towards the next gap between 20,080 and 20,203. The Nifty has a resistance at 5,640 and 5,676. The next important resistance is between 5,950 and 6,000 level. The indices are in an intermediate downtrend and the vertical rise by the indices in the last part of the week suggests that the possibility of the indices having made a good intermediate bottom on January 22. This will be confirmed once the indices exhibit rising minor tops and bottoms. Currently, the targets for the Sensex and the Nifty to go back into a fresh intermediate uptrend are far away and are at 20,986 and 6,260 respectively. The equivalent level for the CNX Mid Cap index to go into a fresh intermediate uptrend is at 8,948 respectively.

Most of the stocks have seen a vertical decline in the last week and as suggested above, we are likely to see sideways or a consolidation for the next few weeks or months as the volatility drops. Under these conditions we are likely to see a trading market in this period as investors will have to either shift to position trading or stay sideways for some time.

Punjab National Bank

PNB has exhibited a strong retracement in the current intermediate rise as the stock has bounced back smartly and is currently facing a resistance at the descending trendline in the daily charts. As explained above, the probability of the indices crossing their earlier intermediate tops is currently low and hence most of the stocks will not be crossing their earlier intermediate tops. PNB is in a major uptrend and will now face a strong resistance at the 670, 695 and 703 levels in the current intermediate uptrend. As I have suggested, the current rise is a trading opportunity for position traders, traders can look for profits at these resistance levels. As long as the relative strength line for the stocks remains strong, investors must hold on to their long positions. The stock has a strong support at the 550 levels.

Union Bank

Union Bank is another stock in the banking sector which is exhibiting a bullish relative strength. The stock has been staying within the rising channel and investors must hold on to their long positions in the stock. The sock has a strong support at the 170 levels and has resistance at 215, 220 and 225 levels. Position traders must look for profits in the stock at these resistance levels and use declines towards the support at 160/170 to pick up long positions. The stock took a support at the 200 DMA in the last intermediate downtrend and is currently in an intermediate uptrend. The stock is likely to see a test of the support at 160/170 as the MACD histogram in the daily chart has exhibited lower bottoms.

Karnataka Bank

Karnataka Bank is still in a major uptrend as the stock has been exhibiting rising intermediate tops and bottoms. The stock has been staying above its 30 WMA and has been exhibiting a bullish relative strength. With the indices expected to consolidate for a while and make lower tops, most of the stock will follow suit. The stock has bounced back smartly and is one of the strong relative strength stocks. Investors must remain invested in such stocks and use pull back towards the 30 WMA to add to the long positions.

For more details contact mayur_s@vsnl.com