Index Outlook: Sensex retains a toe-hold
The Sensex tripped down a gentle slope last week. But the most notable feature of the week's trade was the gritty performance of the Indian benchmark against the back-drop of crumbling global stock prices. The Dow and the FTSE fell 4 cent and the Shanghai Composite collapsed 6 per cent, while Sensex walked away with a minor cut of less than 1 per cent.
Concern over economic slow-down in China and the US coupled with the lurking European credit issue made investors cash out some of the gains made since last March. What with watching the progress of monsoon, the RBI's next move and the second quarter earnings that will start tricking in from next week; an eventful period lies ahead for Indian investors.
Volumes were high in the first half of last week but it petered out in the second. FIIs were selling more than they what they bought for most part. Open interest has climbed above Rs 1,20,000 crore already implying that there is no let-up in speculative activity on our bourses. Put options however continue to outnumber call options implying a bearish bias in trading sentiment.
Short-term oscillators are signalling a bearish bias. The 10-day rate of change oscillator has dipped in to negative zone though it is holding just below the zero line and the relative strength index has moved from bullish to neutral zone. That weekly oscillators are not giving a decisive signal implies that a move is possible in either direction over the medium term.
The whipsaw movement of last week has not made the medium-term direction of the Sensex apparent yet. As discussed in our last column, the medium-term uptrend from the May low of 15,960 is still very strong. Movement last week suggests that buyers are emerging at every dip, in expectation of a rebound.
We stay with the view that a decline to 17,330 or 17,170 is possible in the days ahead. But reversal from these levels would imply that bulls are not vanquished yet. A sideways move between 17,000 and 18,000 can then ensue for a few weeks to be followed by another attempt at moving above 18,000.
This rosy scenario would however be dashed on a close below 17,170.
That would precede a decline to 16,700 or even below 16,000 over the medium-term. It needs to be remembered that our medium-term range remains between 15,500 and 18,000. Investors have to learn to live with volatility for the rest of this year, at least.
A silver lining is however present in the form of a resilient show by some of the other Asian benchmarks. Stocks in markets such as Indonesia, Malaysia, Philippines, Korea, Taiwan, Thailand and India are relatively unscathed in this round of correction and are still close to their 2010 peaks. It is possible that when the correction ends, investors could flock to these markets driving stock prices higher to new 2010 peaks.
The Sensex is currently poised close to key short-term support band between 17,350 and 17,400. Presence of 20-day simple moving average at this level also adds to its significance. A negative reaction to the rate hike can however drag the index down to the next downward target at 17,170. Convergence of many counts at this point makes it likely that a rebound is possible from this level. If not, subsequent supports would be at 17,079 and 16,950. Resistances for the week ahead would be at 17,581 and 17,711.
Nifty (5,237.1)
Nifty moved lower in line with our expectation to achieve the short-term target of 5,213. The index however has key short-term support around 5,210 since the 20-day simple moving average is present here and it is also 38.2 per cent retracement of the index' previous up-move. Knee-jerk reaction to the policy rate hike can drag the index down to 5,167 or 5,150 in the week ahead.
The medium-term uptrend from May 25 low will come under duress only if the index closes below 5,150. That will signal an impending decline to 5,078 or 5,010 in the medium-term.
Resistances for the week ahead would be at 5,284 and 5,322. Traders can initiate short positions on a reversal from either of these levels.
Global CuesThings took a turn for the worse in the global equity market with stocks accelerating lower. It is now confirmed that the medium-term downtrend that commenced in April continues to be in force and the third leg of this move is currently in motion in global equity markets. The fact that some of the major global benchmarks have breached their May lows and have moved below it reinforces this view.
CBOE Volatility index spiked to the peak of 37.6 on Thursday. But it remains below the May high of 48, implying that though there is nervousness, there isn't any panic akin to that witnessed in May.
Words are insufficient to extol the power of Fibonacci numbers in technical analysis. The awesome might of these numbers is once more seen in the Dow Jones Industrial Average's reversal from the peak of 11,258 on April 26. If the retracement of the fall from October 2007 to March 2009 trough is considered, 61.8 per cent retracement occurs at 11,245. The Dow could move a bare 13 points beyond this threshold before launching a medium term reversal.
If we consider the minor counts of the down-move from 11,258, an A-B-C flat was completed at the May low. And following a pull-back rally in June, the third leg of this correction appears to be unfolding now. Targets for this wave are 9,667 and 9,093. In short, the Dow has key short-term support around 9,600, where it is currently halting. Break of this level will drag it down to 9,093. —
The stock traded in a narrow band between Rs 1,060 and Rs 1,090 last week and ended with a marginal increase of Rs 5. Near-term resistances for the stock are at Rs 1,090 and Rs 1,110. The stock's short-term supports are pegged at Rs 1,050, which is where its 200-day moving average is positioned and Rs 1,020. Fresh short positions are advised only on a close below Rs 1,050. Short-term downward targets would be Rs 1,020 and Rs 1,000.
The stock's medium-term trend is down. We reiterate our prior view that if the stock struggles to rally above Rs 1,100, it will mean that a decline to Rs 1,000 or Rs 975 could be in the offing. However, strong move above Rs 1,110 will lift the stock to Rs 1,130 or Rs 1,150. Traders should tread carefully when the stock nears Rs 1,100 levels.
State Bank of India (Rs 2,265.2)The stock dropped 1.5 per cent in the previous week, breaching its 50-day moving average around Rs 2,285. The daily moving average convergence divergence oscillator and the relative strength index continue to point at weakness in the upcoming sessions too.
We re-affirm that the stock can decline to Rs 2,200 or Rs 2,150 in the short-term. Short-term traders can hold their short positions with a stop at Rs 2,300. The near-term key resistances are placed at Rs 2,335 and Rs 2,400. Medium-term trading range for the stock remains between Rs 1,900 and Rs 2,500.
Tata Steel (Rs 474.8)The key short-term resistance band between Rs 500 and Rs 510 limited the stock from moving beyond Rs 500 last week. The stock slipped Rs 15 last week, witnessing selling interest at its key resistance zone. Its near-term down trend can continue lower to Rs 450 in the forthcoming sessions. Moreover, the medium-term trend remains down since its April peak of Rs 701. To negate this view, the stock should dramatically move beyond Rs 550. Fresh short positions can be initiated only on a firm close below Rs 450. Targets below that are at Rs 435 and Rs 415. Key resistances are at Rs 530 and Rs 550.
Infosys Technologies (Rs 2,729)Inability to move beyond the significant medium-term resistance level of Rs 2,800 resulted in the stock tumbling 1.7 per cent for the week. The daily moving average convergence divergence oscillator is signalling a sell and the 14-day price rate of change oscillator too has entered in to the negative territory implying selling interest. Short-term traders can initiate short position with stop at Rs 2,800, with targets at Rs 2,700 and Rs 2,650. Important resistances are at Rs 2,827 and Rs 2,875. —
Sizzling Stocks: Mangalore Refinery and Petrochemicals Ltd (Rs 82.8)
The stock's positive momentum that commenced a week ago on Government's announcement to free pricing of petroleum products and increase retail fuel prices, prolonged last week also. The stock gained 15 per cent to record an intra-week high of Rs 84.5 on Friday, and it ended the week with 13 per cent gain.
The stock still continues to be in an intermediate-term downtrend that commenced from June 2009 peak of Rs 102. A strong close above the intermediate term resistance at Rs 89 will mitigate the stock's downtrend.
However, since late May 2010 low of Rs 64, the stock has been on a short-term uptrend. The stock's 8.6 per cent surge with heavy volume on Friday can make it surpass its immediate resistance level of Rs 85 and take it to Rs 89 in the near-term. Short-term investors can take some profits off the table around these levels. Short-term stop-loss is at Rs 77. Target above Rs 89 is Rs 95. Medium-term investors can hold the stock with stop at Rs 72.
Mirc Electronics (Rs 24.3)Mirc Electronics started to zoom on Wednesday; it gained 11 per cent with good volume in that session. This bullish momentum of the stock prolonged making it gain 32 per cent over the week, emphatically breaking through a long-term resistance level of Rs 21. Since March 2009 low of Rs 8.5, the stock has been on an intermediate-term uptrend. It is currently testing significant resistance at Rs 25.
Inability to exceed this level would signal that investors could take partial profits off from the table. Moreover, that the daily indicators are hovering in the over bought territory signals caution.
Short-term investors can hold the stock with stop at Rs 22.5.
On the other hand, a decline below Rs 21 will drag the stock down to Rs 17. Decisive close above Rs 25 will give the next medium-term target at Rs 29. —
Stock strategy: Consider going short in MTNL
MTNL (Rs 65.05): After registering its 52-low in June at Rs 53, the stock staged a remarkable recovery to Rs 66-67. It finds a major resistance at Rs 73 and has support at Rs 59-60.
The stock, however, seems to have lost some of its steam and could turn weak from here on.
The outlook therefore would remain negative as long as it stays below Rs 95. It however has a strong support at Rs 53, which is also all-time low.
F&O pointer: The stock future (market lot: 4,000) closed at Rs 65.3 with respect to the spot price of Rs 65.05. Though MTNL futures have added open interest from the previous Friday, there was a drop in open interest intra week. This signals that some traders do not expect the stock to move further from this level, and may have preferred to book profits. Besides, the overall market-wide open interest position at 42 per cent in itself is a little on the higher side for this counter. As for calls, there was an unwinding in MTNL 70 call, indicating positive bias.
Strategy: Traders can consider initiating short on MTNL keeping the stop-loss at Rs 68. If the stock opens on weak note and dips below Rs 65, shift the stop-loss to that level for an initial target of Rs 60. Traders with higher-risk appetite can aim for a target of Rs 55, keeping the stop-loss at Rs 70.
Alternatively, traders could consider writing MTNL 70 call, which closed Friday at Rs 1.35.
While the maximum profit is the premium earned, the loss could be unlimited if MTNL surges sharply. This strategy therefore is strictly for traders who can afford to take that risk.
Besides, writing (selling) options involves higher margin commitment.
Follow-up: Last week, we had advised traders to consider shorting GE Shipping and Educomp Solutions. Both the positions are currently in-the-money.
GE Shipping achieved our initial target. Educomp is yet to achieve the target. Traders can keep the position open with a reduced stop-loss. While the stop-loss for GE Shipping could be Rs 293, Educomp can have a stop Rs 536 for the respective recommended targets.
Risk management for volatile markets
Traders often hesitate to apply buy-sell stops on their position for the fear of being stopped out. This article shows how traders can position-size their exposure using money management rule.
Position traders should consider using volatility stops on a closing basis to avoid being stopped out due to normal price volatility. —
The NSE VIX (Volatility Index) has been falling since last month, indicating declining fear among market participants. This should be a cause for concern for traders. For often, declining fear leads to complacent attitude towards risk management.
Of course, fear may well resurface if asset prices decline 5-10 per cent. The question is: How should traders apply risk management rules through fear and greed?
Risk psychology
Investors typically overestimate outcomes that they can imagine easily. Behavioural psychologists call this Availability Heuristics.
This essentially means that investors expect assets to fall, if prices have already fallen sharply. Likewise, they tend to be optimistic after prices climb up sharply.
It does not end there. Behavioural psychologists have shown that investors react differently when they are in the domain of losses than when they are in the region of gains; investors facing unrealized losses will take higher risk than when they are facing unrealized gains (loss aversion effect).
These behavioural traits make it imperative that traders use adequate risk management rules to protect their portfolio from suffering large losses. Risk management rules consist of buy-sell stops and money management rule. This rule effectively helps traders in position-sizing their exposure.
Professional traders typically use two per cent money management rule.
Suppose a portfolio has Rs 10 lakh in assets. The two per cent rule restricts losses on the initial risk exposure to not more than Rs 20,000 in a normal market. How? Assume that the downside risk on a stock (based on stop-loss level) is Rs 50.
The trader cannot buy more than 400 shares of the stock (Rs 20,000 divided by Rs 50). The risk capital allocated for the next trade would be 2 per cent of remaining investment capital.
So, the important question is: How should traders apply buy-sell stops?
Stop philosophy
Traders typically place sell stops below the stock's support level and buy stops above the stock's resistance levels to lower the risk of getting stopped out due to "obvious" price levels.
Trailing stops are used to participate in the upside on trending stocks, without considerably sacrificing unrealized gains should the trend change.
For this, traders first define the stop distance — the distance below the current market price at which the long position may be closed if the stock reverses direction. Often, swing traders use the previous day's close for trailing stop. Stops, however, suffer from a problem. Suppose the price objective on stock is Rs 150 and sell-stop is at Rs 85. There is strong likelihood that the stock would hit the stop-loss and subsequently rise to Rs 150. How should traders reduce this stop risk?
One way is to use volatility stops. This requires first computing the difference between the high and low of a stock for a given period, then taking the average and multiplying it by two. This amount is deducted from the low of the stock to arrive at the stop loss.
Suppose the average high-low difference for a month is Rs 10. The volatility stop would be Rs 20 (Rs 10 X 2). So, if the stock's lowest price for the day is Rs 250, the sell-stop would be Rs 230. Another way is to apply beta-adjusted stop. Such volatility stops help a position from being stopped out due to normal price swings.
Conclusion
Most traders do not use buy-sell stops for the fear of being stopped out. One way to overcome this fear is to give a standing instruction to the offline broker to cut exposure if the price touches the stop-loss level.
Position traders should consider using volatility stops on a closing basis to avoid being stopped out due to normal price volatility.
Trading Terms
Arbitrage is the simultaneous purchase and sale of similar conditions in different markets to take advantage of price discrepancies. The two trades may be in different markets, exchanges, delivery months, or commodities.
Basis is the difference between the current cash price of a commodity and future price of the same commodity. Unless otherwise specified, the price of the nearby future contract month is generally used to calculate the basis. Cash minus futures equal basis.
Bear Market is a market in which prices decline. A market participant who believes prices will move lower is called 'bear'. News is termed bearish if it is expected to result in lower prices.
Breakout is a point when the price moves above resistance or below support. In other words, it is when price of a commodity exits the boundaries of an area pattern (or rises above or below support and resistance lines). It is a technical analysis term used to indicate a rise in a commodity price above its resistance level (such as its previous high price) or drop below its support level (commonly the last lowest price.)
Bull Market is a market in which prices rise. A market participant who believes prices will move higher is called a 'bull'. A news item is considered bullish if it is expected to result in higher prices.
Confirmation is a subsequent signal that validates a position stance. Traders and investors sometimes look for more than one signal or require validation before acting. For example, confirmation of a trend change may entail an advance past the previous reaction high. For an indicator such as MACD, confirmation of a divergence may be a subsequent moving average crossover.
Congestion area : At a minimum, a series of trading days in which there is no or little progress in price. This occurs when the market is trading sideways, awaiting new information before continuing or reversing a trend.
Consolidation: A reversal in the movement of a stock's price counter to the prevailing down trend.
Covering a position: In futures trading, it means that you offset your original position. Whatever is sold must eventually be bought back and vice versa.
Divergence: A divergence occurs when prices move in one direction (up or down) and an indicator based on those prices moves in the opposite direction. Divergences signal impending changes in the direction of a stock's price. A positive divergence happens when an indicator starts moving higher after prices have been in a downtrend (a potentially bullish development). A negative divergence occurs when an indicator moves lower while prices are still rising and is a bearish warning signal
Buy / Sell (Jul 02, 2010) Buy Sell Net FII 1809.09 2114.32 - 305.23 DII 1019.21 992.05 + 26.26
This is list of 10 strong stocks:
Hind Petro, BPCL, Orchid Chem, Aban Off shore, GTL Infra, Nagarjuna Const, BRFL, ONGC, IDFC & Chambal Fert.
And this is list of 10 Weak stocks:
HCL Tech, Sesa Goa, Jindal Steel, Sail, Hind Zinc, India Cement, Sterling Biotech, JSW Steel, Tata Steel & SCI.
The daily trend of nifty is in Uptrend
Derivatives EOD Report on http://www.indiabulls.com/securities/mailermis/derivative-strategy/derivative-EOD-02-Jul-2010.htm
Weekend Platter on http://www.indiabulls.com/securities/mailermis/weekly-reports/weekend-platter-02Jul2010.aspx
CASH LEVELS FOR 5TH JULY SUPPORT / RESISTANCE
Company Name 
Exchange LTP* R1 #1 S1 @1 R2 #2 S2 @2 R3 #3 S3 @3 Aban Offshore Ltd. NSE 834.30 850.05 823.50 865.80 812.70 876.60 796.95 Bank of Baroda NSE 715.55 723.03 710.13 730.52 704.72 735.93 697.23 Bank of India NSE 357.00 361.27 353.47 365.53 349.93 369.07 345.67 Banking Index Benchmark Exchange Traded Scheme (Bank BeES) NSE 948.50 952.63 942.73 956.77 936.97 962.53 932.83 Bharat Electronics Ltd. NSE 1723.25 1738.50 1709.50 1753.75 1695.75 1767.50 1680.50 Bharat Petroleum Corporation Ltd. NSE 666.75 673.42 660.67 680.08 654.58 686.17 647.92 Bharti Airtel Ltd. NSE 264.70 266.00 263.25 267.30 261.80 268.75 260.50 Bombay Dyeing & Manufacturing Company Ltd. NSE 483.35 487.83 479.93 492.32 476.52 495.73 472.03 Bombay Rayon Fashions Ltd. NSE 255.80 260.67 252.37 265.53 248.93 268.97 244.07 GTL Infrastructure Ltd. NSE 45.80 47.10 44.90 48.40 44.00 49.30 42.70 Hindalco Industries Ltd. NSE 143.75 145.57 141.77 147.38 139.78 149.37 137.97 Hindustan Construction Company Ltd. NSE 117.55 118.90 116.50 120.25 115.45 121.30 114.10 Hindustan Motors Ltd. NSE 23.40 23.85 23.10 24.30 22.80 24.60 22.35 Hindustan Oil Exploration Company Ltd. NSE 222.70 226.87 220.07 231.03 217.43 233.67 213.27 Hindustan Unilever Ltd. NSE 268.40 272.20 265.90 276.00 263.40 278.50 259.60 India Cements Ltd. NSE 106.55 107.52 105.57 108.48 104.58 109.47 103.62 Indian Bank NSE 220.70 225.70 217.85 230.70 215.00 233.55 210.00 Indian Oil Corporation Ltd. NSE 401.30 407.12 397.37 412.93 393.43 416.87 387.62 Indian Overseas Bank NSE 103.15 104.52 102.22 105.88 101.28 106.82 99.92 Jindal Steel & Power Ltd. NSE 615.20 620.73 610.33 626.27 605.47 631.13 599.93 JSW Energy Ltd. NSE 124.60 125.67 123.67 126.73 122.73 127.67 121.67 JSW Steel Ltd. NSE 1029.75 1044.50 1017.50 1059.25 1005.25 1071.50 990.50 Nagarjuna Fertilisers & Chemicals Ltd. NSE 33.00 33.67 32.02 34.33 31.03 35.32 30.37 NSE Index NSE 5237.10 5267.70 5216.05 5298.30 5195.00 5319.35 5164.40 Oil & Natural Gas Corporation Ltd. NSE 1306.30 1320.97 1296.07 1335.63 1285.83 1345.87 1271.17 Sesa Goa Ltd. NSE 346.90 352.00 343.50 357.10 340.10 360.50 335.00 Shipping Corporation of India Ltd. NSE 156.70 158.03 155.93 159.37 155.17 160.13 153.83 Steel Authority of India (SAIL) Ltd. NSE 190.05 191.82 188.77 193.58 187.48 194.87 185.72 Sterling Biotech Ltd. NSE 108.00 109.95 106.80 111.90 105.60 113.10 103.65 Tata Motors Ltd. NSE 766.40 773.83 760.98 781.27 755.57 786.68 748.13 Tata Steel Ltd. NSE 474.95 480.25 470.40 485.55 465.85 490.10 460.55
*Disclosure: I don't have any positions in the above said scrips & NIFTY FUTURES.
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Arvind Parekh
+ 91 98432 32381
