Protection against Dubai fever

Written by Mayur Shah | Updated: Dec 1 2009, 04:44am hrs
The Dubai debt crisis triggered a technical correction on Thursday and Friday resulting in the Sensex closing below its intermediate downtrend target of 16,635 and the Nifty did drop well below its intermediate downtrend target of 4,932.80, but closed just above it. Short covering in the later half of the day resulted in the sharp bounce back and the Nifty will have to close below 4,932 to confirm an intermediate downtrend.

Both the Sensex and the Nifty took an intra day support at the weekly support level of 16,170 and 4,800 and bounced back smartly in the last few hours on Friday resulting in the indices closing well above this support. On the daily charts, the Sensex and the Nifty have closed just above their respective 20 DMA of 16,632 and 4,937 and a close below these levels will result in these indices testing the weekly support again and even falling below the weekly supports towards the next supports of 15,650 and 4,637.

The Sensex and the Nifty have already exhibited a lower intermediate top and this is the first sign of weakness in the current bull-run. The earlier intermediate bottom for the Sensex is at 15,330 and for the Nifty it is at 4,538. As long as the current intermediate downtrend ends above these levels, the major uptrend remains intact. A close below these levels will result in the end of the major uptrend which had started in March 2009. The equivalent level for the CNX Mid Cap index is at 6,370.85.

In the last week, majority of the indices ended in red as the Sensex lost 2.29% and the Nifty ended 2.19% lower. The CNX Mid Cap index ended 1.75% lower. Defensive stocks have ended in green as the BSE Healthcare index was the largest gainer ending 0.90% higher and was followed by the BSE Auto sector which gained 0.30% higher. On the weaker side, the BSE Reality index was the largest loser ending 6.34% lower and was followed by the BSE IT sector which lost 3.79%.

The crisis in Dubai could engulf more countries, if they are not bailed out soon. This could result in the bigger correction and an end to the bull run. This will be confirmed once the indices drop below their earlier intermediate bottoms. However, a fast bail out could result in the indices correcting less and the indices could remain sideways between the support and the recent intermediate highs for some time before they again move higher.

The weekly MACD Histogram has already been exhibiting a negative divergence indicating that the momentum is slowing down and either we will see a sideways correction for a few weeks or the major trend could turn down if the crisis in Dubai deepens. Under these circumstances, investors must currently look at defensive stocks for some time. I would like to see a follow up to Fridays recovery and this will suggest more improvement. Otherwise, the intermediate downtrend will be confirmed.

Cipla recently made a new high and after the pull back in the last week, the stock has bounced back smartly on Friday. The relative strength line of the stock has been improving and the pull back towards the support of 310 in the last week was a good buying opportunity for swing and position traders. As the major trend of the stock is up and the relative strength bullish, investors must hold on to their long positions with a stop at 274. Traders can look for long positions as the stock is headed higher in the current intermediate uptrend.

Sun Pharma is in an intermediate uptrend and has not exhibited weakness following the Dubai crisis. This is the sign of strength and any stability in the indices will result in the stock heading higher. The intermediate trend is still up and as long as the stock stays above 1395, the intermediate uptrend will remain intact. The stock is currently at the earlier minor top of 1499 and a close above this level will result in the stock heading higher towards the next resistance of 1,540 and 1,585. Investors must hold on to their long positions with a stop at 1,309, which is the earlier intermediate bottom.

Ranbaxy is in a major uptrend and has been exhibiting ascending intermediate tops and bottoms. The intermediate trend of the stock is up and even after a strong drop by the indices and most of the stocks on Thursday and Friday, the stock held on and made a new intermediate high. This suggests that the stock is headed higher towards the next weekly target of 468 and traders can look for long positions in the stock. Investors must hold on to their long positions with a stop at 362. Position traders must keep a stop at 414 and trail this stop higher.

For more details contact mayur_s@vsnl.comp.