Anil Manghnani,Modern Shares & Stock Brokers

As mentioned last week, the markets were looking stretched and thus it was no surprise to see them correct in the past week. In addition, we are once again witnessing an increase in the intra day volatility. In addition, the volatility in global markets can also be attributed to the jitters that we are witnessing in our own markets.

The Sensex and Nifty have taken support at the first major levels of 13985 (Sensex) and 4112 (Nifty) respectively. Any break below these supports could see the Indices test their next major supports placed at 13779 & 4055 to 4031 respectively. I do feel that these levels will hold in the coming week. In a worse case scenario (which looks doubtful in the immediate near term), the Sensex & Nifty could fall to the support range of 13500 -13220 & 3971 – 3887 respectively.

On the upside the targets for the Sensex are placed at 14267-14426-14683-14764-15100. For the Nifty these targets are at 4202-4249-4333-4352-4390. The trading strategy in the short term would be to book profits at higher levels and buy the falls at the support levels strictly with a trading perspective.


Hitendra Vasudeo,stockmechanics.com

Short-term traders and investors do not have much choice but to exit long positions in loss or profit on Sensex spurts to 14252-14494

Sensex bruised!
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By Hitendra Vasudeo

The Sensex could not make a new high last week as it struggled to move near its peak of 14725. The high registered last week was 14683.26 and it surrendered to bear traders and profit hungry investors to lose strongly on a week-to-week basis. Last week, the Sensex opened at 146183.36 attained a high at 14683.36 and crashed to a low of 14010.61 to finally close at 14063.81, recording a net loss of 475 points on a week-to-week basis.

As a result of the sharp fall, the weekly trend has turned down. The weekly trend can turn up again on rise above 14725 during the week or if the Friday weekly close is above 14320. The sharp weekly fall last week has ultimately resulted in an Engulfing Bear candlestick pattern. The effects of this bearish pattern can be negated only if the Sensex gives a breakout and weekly close above 14725. Till then, a pull-back rise towards 14725 can be used to exit long position in loss or profit and to sell. Fresh buying in index-based stocks can be undertaken only on breakout and close above 14725. This view is more pertinent to the 30 stocks from the Sensex and may not be relevant to selective stock outperformers. A big black candle has occurred.

This is bearish as prices closed significantly lower than they opened. If the candle appears when prices are high, it may be the first sign of a top. If it occurs when prices are confronting an overhead resistance area (e.g., a moving average, trend line, or price resistance level), the long black candle adds credibility to the resistance. Similarly, if the candle appears as prices break below a support area, the long black candle confirms the failure of the support area.

An engulfing bearish line occurred where a black candle's real body completely contains the previous white candle's real body. The engulfing bearish pattern is bearish during an uptrend (which appears to be the case with the BSE Sensex). It then signifies that the momentum may be shifting from the bulls to the bears. The Sensex has reacted from an important resistance area of 14725 by making a high of 14683. It has also violated 2 weeks low with the strong negative black candle- Engulfing Bear. It also looks at this point that 5 waves from 12316 to 14683 have been completed, unless it unfolds another larger degree move.

Before going further, we would like to take up the wave count.

Review of the Elliot Wave Count to get the broad market picture: First Count: Wave 1- 2594 to 3758; Wave 2- 3758 to 2828; Wave 3-2828 to 12671; Internals of Wave 3 Wave i- 2904 to 3416 Wave ii- 3416 to 2904 Wave iii- 2904 to 6249 Wave iv- 6249 to 4227 Wave v- 4227 to 12671 Wave 4 Wave a -12671 to 8799 Wave b-8799 to 14723 Wave c-14723 to 12316 Wave 5- 12316 to 14683 Internals of Wave 5 Wave 1- 12316 to 13386 Wave 2- 13386 to 12425 Wave 3- 12425 to 14384 Wave 4- 14384 to 13554 Wave 5- 13554 to 14683

If the above wave count proves to be true, then we are looking for a larger degree of correction. The retracement in this case would be of the rise from 2594 to 14683. In that case, the 0.250 and 0.382 retracement levels of the rise from 2594 to 14683 will be at 11645 and 10086. But this is a big correction. Such kind of a correction can be confirmed only on fall and close below 12300.

Alternatively, Wave 4 could still be in progress with the formation of an Expanding Triangle. If we get into an Expanding Triangle, then the following will be the internals of Wave 4: Wave a -12671 to 8799 Wave b-8799 to 14723 Wave c-14723 to 12316 Wave d- 12316 to 14683 (some kind of Wave d failure) Wave e-14683 to 14010 (current move in progress)

Wave e can move down towards 12300 or below. Once ‘a-b-c-d-e’ formation is complete, Wave 4 will get complete and then expect a rally once again to make new highs for Wave 5. If the level of 13500 gets violated on weekly closing, then this option of Expanding Triangle would come into contention. Another possibility is that the current upmove from 12316 to 14683, which now appears to be complete, is of the smaller degree move with a larger Wave 5. That means the move from 12316 to 14683 is just an internal configuration of the next bigger Wave 5 from 12316. Then we could see a retracement of the rise from 12316 to 14683. The retracement levels will be placed at 13780-13500-13220.

Looking at the support of 13500, the Sensex can afford to fall down to the retracement level of 13780-13500. The Sensex cannot afford to fall and close the week below 13500. If that happens, then all possible hopes of an intermediate short-term upmove will get punctured. But the super long-term picture does not change. To get confidence, have a look at the 100 year chart of Dow Jones. It has seen a few world wars and few great depressions but still it made new highs in the long-term. The only problem is the life span of an investor and which cycle the life of an investor fits into.

Till the Sensex is above 13500, we still have hopes for the rally to get past 14725. On a long-term view, the Sensex will ultimately make a new high but the question is: Will the higher bottom of 13500 and 12300 get breached? If these important higher bottoms get breached, the time horizon of the Sensex making a new high can only get delayed and it would be at its own sweet time. The time horizon changes with sharper and deeper corrections but the super long-term picture and super long term bull run will not get terminated.

Traders and short-term investors get affected by the sharper and deeper falls, especially the future traders. But super long-term investors who are not frequent visitors to the market make the most of the deeper and larger correction. Such investors have liquidity, holding capacity and patience to make the most out of stock markets. Their objective is never to make a quick buck with limited capital. Investment opportunities are only twice or thrice in a year and that is the time for real investors to invest and accumulate. Keep a thumb rule, any 6-10% fall in the indices in very short term can offer good opportunity for investment but only in A Group or Index based stocks.

Coming back to our weekly update, for the time being we can expect a retracement of the fall from 12316 to 14683. Expect a fall down to 13780-13500 range at least if the Sensex does not cross and close above 14725 in next few days or next couple of weeks. Weekly supports of the weekly pivot are 13821 and 13149. Weekly resistance will be at 14252-14494-14680. In case of a close above 14725, the final weekly pivot will be at 15167.

If the Sensex retraces to 13780-13500 and then gives a breakout above 14725 or straight away gives a breakout to cross 14725, then expect the Sensex to rally strongly to 16150 at least and to an outer extent to 18500. This can happen in the balance part of the year on a comprehensive breakout and close above 14725. From a weekly traders perspective, use the rise to 14252-14494-14680 to sell with a stop loss of 14725 Ideally, weekly traders can wait for a rise above 14494 and when it falls below 14494 then sell with the high of the week as the stop loss to subsequently cover at 14252-13821 as the opportunity arises.

Strategy for the week

Short-term traders and investors do not have much choice but to exit long positions in loss or profit on Sensex spurts to 14252-14494. This view may not be applicable to stocks other than Sensex stocks. But as a general strategy, it would be better to exit long positions in weak stocks and get into stocks, which make new historical highs and not just a 52-week high. Traders can sell on rally to 14252-14494 with a stop loss of 14725 or a Friday weekly closing stop loss of 14320.