Declivity in the automobile sector

Updated: Apr 29 2007, 07:51am hrs
In the last week we saw the indices had come very close to their earlier tops, but profit booking on Friday resulted in a strong decline by the indices. In the current intermediate uptrend which had started on the April 2, fewer stocks have been participating in the uptrend indicating that the current rise is a corrective rise. Friday's strong decline has wiped out four day's gains indicating a strong downward momentum and a possibility of a start of a fresh intermediate downtrend.

The targets for the Sensex and the Nifty to drop into a fresh intermediate downtrend are at 13,423 and 3,933 respectively. The equivalent target for the CNX Mid Cap index to drop into a fresh intermediate downtrend is at 5,051.95. These levels will be raised after the current minor decline ends and a minor rise starts.

In the earlier intermediate downtrend in February, we saw the indices drop below their earlier intermediate bottoms suggesting that the major trend is down. Now, if the current intermediate uptrend ends below the February highs, the major trend will be either down or sideways. The major downtrend will be confirmed once the Sensex drops below 12,315 in the next intermediate decline. On the other hand, if 12,315 is held and the Sensex makes a higher bottom, than, the major trend will be sideways.

The volume action in the current intermediate rise was not bullish and as I have been pointing out earlier, the trading volumes were lower than the 50 days moving average throughout the intermediate rise and moved above the 50 days moving average on the last two trading sessions. This also suggests that the current intermediate rise is a corrective trend. Also, with fewer stocks participating in the intermediate rise, the current intermediate uptrend is a rally.

In the last week the sensex ended with a marginal gain of 0.08% and the Nifty ended unchanged. The CNX Mid Cap index ended 0.64% higher. Among the sectors, the BSE Bankex bounced back gaining 2.50% and was followed by the BSE Auto index which ended 2.34% higher. On the bearish side, the BSE Consumer Durable index ended 3.51% lower followed by BSE Healthcare index which ended 2.56% lower.

Few sectors like the automobile, cement and the tech stocks have been lagging in the current intermediate downtrend and could lead the next intermediate downtrend. Most of the automobile stocks have been in a major downtrend and more weakness will be seen if the indices start an intermediate downtrend.

Ashok Leyland is in a major downtrend as the stock has been exhibiting descending intermediate tops and bottoms and has been staying below its 30 WMA. It is currently facing a strong resistance at the 10 WMA, which now acts as a resistance to the current intermediate rise. Even though the intermediate trend of the stock is up, the rate of rise by the stock has been lower than the indices resulting in a weak relative strength line which is making new lows. A drop below 37.15 will confirm an intermediate downtrend and as the major trend of the stock is down, traders can look for short positions in the stock. Investors must avoid the stock as the sector as well as the stock is in a major downtrend and lower levels will be seen in the current major downtrend. The weekly MACD histogram is exhibiting lower bottoms indicating that the stock will follow suit.

Maruti Udyog is another stock in the automobile sector which has been exhibiting a weak relative strength and is also in a major downtrend. The stock is well below its 30 WMA and is facing a strong resistance at the 10 WMA. The current intermediate rise by the stock has been very weak and a drop below 757 will mean a start of a fresh intermediate downtrend. The earlier intermediate bottom by the stock is at 738 and a drop below this level will mean lower levels by the stock. The weekly MACD indicator for the stock is bearish and is staying below its trigger line. The weekly MACD Histogram has been exhibiting lower levels indicating that the stock will follow suit and drop below its earlier intermediate bottom. The relative strength line for the stock is weak and investors must stay away from the stock.

Tata Motors is also in a major downtrend as the stock has been exhibiting descending intermediate tops and bottoms and is staying below its 30 WMA. In the earlier intermediate downtrend, the stock took a support just above the earlier major bottom of 650. The relative strength line for the stock is weak and the weekly MACD histogram for the stock has been exhibiting lower bottoms indicating that the stock will soon test the 650 level. A drop below 650 will mean lower levels and more weakness. Investors must wait and see if the stock is able to hold above the 650 level in the next intermediate downtrend and only than, they must look for longs. They must also check for the strong volume action in the next uptrend. Currently they must stay away.