Last week started on a strong note with good participation from IT stocks, following the appreciation in the dollar against the rupee. But as the week proceeded, concerns over rising inflation due to high commodity prices dampened the mood. The market failed to hold on to its early gains and ended the week on a bearish note.
The Sensex had corrected around 31% in the fall from 21,206 to 14,677 between January and March, and then made a high of 17,735 on May 5. Since then, the market has been rolling downhill. This time, however, the selling was not accompanied by heavy volumes.
Much of the damage has been caused by a lack of buying interest. The Sensex
finally closed the week below its 200-day moving average (DMA) at 16,737, down 5% over previous Friday’s close.
On the weekly chart, the Sensex has made an “engulfing bearish” pattern and the stochastic oscillator has also given a ‘sell’ signal. Thus, we may see further weakness in the market. In the coming days, it can test 16,567 and 16,206, which are 38.20% and 50% retracement levels of the recent bounceback from 14,677 to 17,735. At higher levels, the range between 17,650 and 17,750 will act as a strong resistance in the short term. On the daily chart, the stochastic oscillator has entered the oversold territory.
Thus, some bounce may be witnessed in the next few trading sessions, and the Sensex can rise to 17,000 -17,050. But the strategy should be to exit from long positions and take fresh long positions only if Sensex crosses the upper band.
For longer term, one should not forget that the Sensex had made an “engulfing bearish” pattern on the quarterly chart and the stochastic as well as the RSI oscillators are still giving sell signals. The market is not sustaining comfortably above its 200 DMAs, and most of the sectoral indices like realty, bankex, auto, capital goods and PSU, are also facing heavy resistance near their 200 DMAs like.
Over the past two weeks, many stocks are giving false breakouts, indicating a lack of follow-up buying. This is not a good sign for the market. We are still in the bear market phase and one should consider the recent rally as a bear market rally. Long-term investors should use such rallies as an exit opportunity.
Sector to ‘watch’
The BSE Metal index is showing a lot of strength on the charts. In the coming days, this index can outperform the broader markets and can rise by 8-10%.
Stocks to ‘buy’
Tata Steel: (Rs 841)
Last week, it broke its resistance range of Rs 835-845 with good volumes. We recommend a ‘buy’ with the price target of Rs 950 and a stop-loss of Rs 785.
Sesa Goa : (Rs 4,010)
This is another stock, which can give decent returns from the current levels. Last week, it broke its all-time high of Rs 3,969 and touched Rs 4,400. The target would be around Rs 4,600.
Stocks to ‘sell’
Reliance Industries: (Rs 2,534)
It has broken the support level of Rs 2,556 on Friday. On a bounceback, one can go short in the range of Rs 2,575 to Rs 2,600, with a price target of Rs 2,375 and a stop-loss of Rs 2,701.
Sobha Developers: (Rs 567)
The overall realty sector is looking weak; Sobha has broken its all-time low of Rs 575. This stock can come down to Rs 450. We recommend a ‘sell’ with a stop-loss of Rs 626.
Manas Jaiswal,
Senior Technical Analyst, Emkay Shares & Stock Brokers
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