Here, but not yet arrived

Written by Mayur Shah | Updated: Sep 28 2008, 07:01am hrs
After pulling back in the last week towards the neckline of the "Head and Shoulder" formation, the indices declined on four of the five trading days in the last week and are headed to test the recent intermediate bottoms of 12,500 by the Sensex and 3,800 by the Nifty. The major trend of the indices is down and the earlier intermediate tops by the Sensex and the Nifty are at 15,580 and 4,650 respectively. These levels will have to be crossed in the next intermediate rise if the indices were to go back into a major uptrend. The equivalent level for the CNX Mid Cap index is at 6,016.

The indices have already tested the supports at the earlier intermediate bottoms and now, this support may not hold for the third time and the indices could slip below the earlier intermediate bottoms making new lows. The test of the earlier intermediate bottoms and the current year's lows will be tested in the coming week and unless there is big positive news in the US on Friday, the indices are headed lower.

The indices ended lower in the last week as the Sensex lost 6.70% and the Nifty ended 6.12% lower. Among the sectors, the BSE FMCG sector was the lone sector, which ended 0.64% higher. On the bearish side, the BSE Realty sector was the largest loser, ending 12.33% lower and was followed by the CNX IT index, which lost 12.25%.

The target for the Sensex and the Nifty to get back into a fresh intermediate uptrend is at 14,221 and 4,303.25 respectively. The equivalent target for the CNX Mid Cap index to get back into an intermediate uptrend is at 5,333.75.

On the weekly chart the MACD Histogram is exhibiting ascending bottoms even as the indices are exhibiting descending intermediate tops and bottoms. This means that these indices are exhibiting a positive divergence, indicating that the momentum on the downside has been reducing. This however does not confirm that the bottom is near till we see a rise by the stocks and the indices with strong volumes. However, on the daily charts, the MACD Histogram has made lower bottoms, indicating a test of the recent lows in the coming week.

All bear markets will give investors a good opportunity to get into stocks and sectors, which are likely to lead the next bull run.

Not all stocks are closer to their earlier intermediate bottom like the indices and once the indices bottom out, the stocks which are higher than the earlier intermediate bottoms will take a lead in the next bull run. Also, new stocks and sectors usually lead the next bull run and we must keep this in mind.

An investor must keep a close watch at the volume action, as strong volumes on up days and low volumes on down days will be the first sign that big institutional investors are getting into the stock.

I will take a look at a few stocks, which are well above their earlier intermediate tops. This however, does not mean that they won't breakdown. Investors must keep a list of such stocks and look at the volume action. Get in when the time is ripe in stocks, which are exhibiting a strong relative strength and money flow.

Maharashtra Seamless

Maharashtra Seamless is in a major downtrend and has been staying below its falling 30 WMA. Since the past few months, the stock has been getting a support at the 250 level and has been trading sideways between 245 and 350.

It is too early to suggest that this is a bottoming process unless we see a strong breakout above the 350 level with a strong surge in trading volumes. On the other hand, a drop below 245 will mean the continuation of the major downtrend and lower levels for the stock.

Investors must wait for a strong breakout above the 350 level with a strong surge in trading volumes to get into the stock.

Jindal Saw

Jindal Saw is one of the few stocks, which is in an intermediate uptrend currently. The stock has currently come close to its 30 WMA, which is the first resistance to the stock. The relative strength line for the stock has improved and is moving higher and this is one stock, on which investors must keep a close watch.

A higher intermediate bottom in the next intermediate correction will be a sign to get into the stock as the relative strength of the stock is already bullish.

Balrampur Chini

Balrampur Chini is oscillating about its 30 WMA and is exhibiting descending intermediate tops and ascending intermediate bottoms. Hence the relative strength line is neutral to positive. A breakout above 98.85, which is the earlier intermediate top, will confirm a start of a major uptrend and investors can look for long positions in the stock.

For more details contact mayur_s@vsnl.com