Sensex (17,868.3)
The Sensex had just begun to flap its wings to soar above the 18,200 barrier when it was checked abruptly by the RBI's policy rate hike. Earnings disappointments from some of the top-rung companies made the index retract further to close 263 points lower. Though the index did not collapse last week, yet another failure to breach the above-mentioned barrier does no good to the morale of market participants.
Earnings announcements will continue to dictate stock price movement in the week ahead. It however needs to be borne in mind that August ushers in sluggishness in the stock markets, probably because some countries have summer holidays in this month. So a spectacular rally or a crash seems extremely improbable in immediate future.
Derivative volumes spiked higher close to expiry while the cash segment recorded moderate volumes. Index put-call ratio moved lower as traders utilised the weakness to close some of their short positions. Open interest for August series opens above Rs 1,20,000 crore; probably the highest ever series-opening in India.
The Sensex has not made any headway in the month of July and closed with modest 167-points gain. Since seven months of 2010 have already gone by, it is time to briefly revisit our yearly outlook for Sensex published on January 3 this year.
Our prognosis then had been, "Our preferred view is that the index will move a little higher from current levels in the early part of the year before turning choppy or even going into deeper decline. The levels within which the index is expected to move next year are 12,000 and 18,500. The upper limit for the year is 20,772 and the lower limit is 9,800. We will revisit the long-term counts if these limits are breached."
Although the index closed in on the upper end of the preferred range on numerous occasions, it has shown remarkable resilience in holding way above the 12,000 mark; that was our lower boundary. As we have pointed out earlier, the intermediate-term range within which the index is moving over the last nine months has higher troughs and peaks, indicating a bullish undercurrent.
That has resulted in moving the lower boundary for the year higher to 15,500. Next support zone for this year is also moved higher to that between 14,300 and 14,850. What is more important is that this pattern suggests that an upward break-out from this range is more likely than a lower one.
Although the long-term outlook is beginning to turn positive, we continue to advise caution from a medium-term perspective because of the strong resistance around 18,000. Key medium-term support is 17,400 and breach of this level will imply a possible fall to 16,850 or even below in this period.
The short-term trend has also reversed lower since the recent peak at 18,237. The doji star indicated last week proved to be a short-term peak and the index is moving with a negative bias since then.
Oscillators in the daily chart corroborate this weak outlook.
The 10-day rate of change oscillator has declined in to the negative zone and the 14-day relative strength index positioned at 52, is on the verge of moving in to bearish zone.
Outlook for the week ahead is bearish. The index is currently hovering around the short-term support at 17,900, where the 21-day simple moving average is also positioned. The Sensex can however decline below this level to 17,716 or 17,395 in the near-term. Resistances for the week would be at 18,084 and 18,237.
The Nifty (5,367.6) too could not overtake the recent peak of 5,477 and declined to the intra-week low of 5,350 instead. The near-term trend in the index is down and immediate supports are at 5,381, 5,321 and 5,225. Since the index is hovering around the first support, short-term traders can wait for a firm move below 5,350 before divesting their long positions. An upward reversal early next week can take the index to 5,480 or 5,505.
Traders ought to tread cautiously as long as the Nifty trades below the key medium-term resistance zone between 5,450 and 5,550 indicated last week. Reversal from here can pull the index down to 5,050 or below over the medium-term. Conversely a strong move beyond this zone can take the index to 5,780.
Global benchmarks gave up some of the gains in the later part of the week to end on a flat note.
The iffy movement in European and American indices maintains a question mark over the reversal of the medium-term downtrend from the April peak. In other words, sharp declines from current levels will mean that the third leg down of the down-move from April highs is in progress.
CBOE VIX inched up gradually over the week but it recorded a sharp decline from the intra-week peak of 27.3 on Friday. Traders were perhaps happy to see market's indifference to decelerating GDP growth in the US.
The Dow reversed lower from the intra-week peak of 10,585. We maintain that key resistance for this index stays at 10,650.
The index needs to close above this level to signal the reversal in the medium-term down-trend.
Inability to do so can drag the index down to 10,000 or even below over the ensuing weeks.
Asian benchmarks such as Jakarta Composite, KLSE Composite, Sri Lanka All Share Index, Thailand's SET Index bucked the trend and closed the week at new 52-week highs. The Shanghai Composite also built on its gains.
Sizzling stocks: Maruti Suzuki (Rs 1,198.1)
The Maruti Suzuki stock tumbled 12 per cent forming a downward gap on Monday following its Q1 results announcement. It reported a year-on-year drop in net profits due to higher royalty payments. Subsequently, the stock hovered around Rs 1,200 and ended the week with a fall of about 12 per cent. It is hovering well below its 50 and 200-day moving average and is testing the key medium-term support band between Rs 1,170 and Rs 1,200.
The stock has been in an intermediate-term downtrend since its life-time high of Rs 1,740 recorded in September 2009. Strong weekly close below Rs 1,170 will drag the stock lower to next support level at Rs 1,000 and then Rs 1,050 in the medium-term. However, failure to breach this support would result in the stock moving sideways in the broad range between Rs 1,170 and Rs 1,400. Key short-term resistances are at Rs 1,250 and Rs 1,300.
McDowell Holdings (Rs 177.4)
Following an extra-ordinary 39 per cent jump during the third week of July, McDowell began this week with negative bias. However, this trend did not last long. On Thursday, the stock advanced 20 per cent forming a rising three method candlestick pattern which is a bullish continuation pattern. Further, it surged another 18 per cent on Friday accompanied by heavy volumes and closed the week with 30 per cent gains.
The stock is facing significant long-term resistance in the Rs 190–200 range. Reversal from this resistance will pull the stock down, correcting it to its immediate support at Rs 155 or to Rs 130 in the medium-term. However, a decisive close above Rs 200 will give a medium-term target of Rs 235. —
Pivotals: Reliance Industries (Rs 1,009.6)
RIL appears to have conclusively breached the lower boundary of its sideways consolidation range and the 50 as well as 200-day moving average which were poised around Rs 1050 last week. It is pausing just above its key intermediate-term support level of Rs 1,000. Hence, traders holding short positions should tread cautiously until the stock breaches this support emphatically. Subsequent targets are at Rs 986 and Rs 976. Near-term resistances are at Rs 1,030 and Rs 1,050.
We re-affirm that the stock is in a medium-term downtrend. But it has strong support just below, at Rs 950. Next medium term support is at Rs 850. An up-move above Rs 1,090 is needed to mitigate this downtrend.
State Bank of India (Rs 2,503.8)
Last week the stock witnessed volatile movement. SBI finally ended the week with an advance of Rs 9, with above weekly average volume. It is re-testing important near-term resistance level of Rs 2,500. A healthy surge above Rs 2,500 will push the stock to Rs 2,550 in the near-term. Short-term traders holding long positions can continue to do so with stop-loss at Rs 2,450. However, failure to surpass the current resistance will pull the stock once again to Rs 2,450 and then to Rs 2,400.
The medium-term trend is still in sideways consolidation in a broad range between Rs 1,900 and Rs 2,500. Strong rally above Rs 2,500 would lead the stock to Rs 2,650 in the medium-term.
Tata Steel (Rs 537.1)
The stock moved sideways last week in a narrow band between Rs 530 and Rs 545. The key medium-term resistance is ahead at Rs 550, and together with last week's subdued stock movement with below average volume, gives short-term cautiousness. Short-term traders holding long positions can book profits if the stock reverses from Rs 550 Those with higher risk appetite can hold the stock with stop at Rs 520 and the near-term target of Rs 560. A dive below Rs 520 will pull the stock lower to Rs 500 and Rs 480.
The medium-term trend remains down for the stock since April this year. Strong move above Rs 575 would mitigate this downtrend.
Infosys Technologies (Rs 2,788.8)
Infosys Technologies moved up initially to an intra-week high of Rs 2,840 before declining. The stock has formed a doji candlestick pattern in weekly charts, signalling a neutral near-term stance. The stock is once again testing its key resistance level of Rs 2,800. We expect the stock consolidate sideways in the range between Rs 2,740 and Rs 2,840 in the coming week. Key support and resistance beyond this range are at Rs 2,700 and Rs 2,870 respectively.
The stock has been on a medium-term uptrend since this February. Investors with a medium-term horizon can continue to hold the stock with stop at Rs 2,600
Stock strategy: Consider shorting Bombay Rayon Fashions
Bombay Rayon Fashions: (Rs 264.9): After reaching its 52-week high at Rs 277, the stock witnessed a sharp fall on Friday. The outlook remains positive for the stock as long as it stays above Rs 218. However, in the short-term, the stock could see some pressure. It finds an immediate support at Rs 248 and resistance at Rs 274. We expect the down-trend to continue in the short-term that can take the stock to the Rs 250-253 zone.
F&O pointers: The derivative trading also presents a negative bias for the stock as it shed open interest along with fall in prices. The Bombay Rayon Fashion futures (market lot: 1,000) witnessed a drop of 21 per cent or 13.57 lakh shares in open interest, signalling profit booking. Options are not that active to elicit any view. Despite heavy unwinding on Friday, the overall market-wide open interest position stood at 45 per cent. It witnessed a healthy rollover of 83 per cent to August series.
Strategy: Traders can consider initiating short on Bombay Rayon Fashion (August) futures keeping the stop-loss at Rs 274 for an initial target of Rs 248.
India Cements (Rs 107.2)
This stock is in a downtrend and the outlook would turn positive only if India Cements closes above Rs 155. After registering its 52-week low in November 2009 at Rs 96.8, the stock had been trying to stage a come back only to meet with a resistance. The stock now finds crucial resistance at Rs 115, support at Rs 98. The stock is likely to move in a narrow band of Rs 100-115.
F&O pointers
The India Cements futures (market lot: 2000) closed with marginal premium to the spot's close of Rs 107. It witnessed a higher rollover of over 92 per cent to August series. Despite gains on Friday, India Cements futures shed open interest, signalling that traders are not willing to bet on long side.
Strategy
Traders can consider going short on India Cements futures with a stop-loss at Rs 112 for a target of Rs 100.
Follow-up
Last week, we had advised traders to consider going long on Alstom Projects and short on Praj Industries August futures. Alstom Projects hits our stop-loss. Praj Industries still rules in-the money. Those who are holding the profitable position could continue to do so with recommended targets.
They show us how retail investors were lured into transactions that were far from reasonable.
The common thread is how retail investors were unable to resist the whirlpool of speculation.
The history of Indian equity markets is littered with instances of questionable conduct of individuals and institutions seeking a quick buck. A look back at some of these scams could provide useful lessons on how unscrupulous entities could distort market fundamentals and lull investors into a sense of false belief in the markets. They are also a reminder that the crowd is not always right, a useful lesson in volatile markets where stocks tend to soar for no rhyme or reason.
The first and possibly the most infamous of market manipulators was Harshad Mehta, who siphoned an estimated Rs 1,440 crore from the banking system and ploughed it into stocks. His modus operandi was to siphon money from the banking system and channel it into equity markets, pushing up prices and booking profits.
Between 1990 and 1992, Harshad Mehta acted as broker enabling short-term inter-bank lending and borrowing using government securities as collateral, only he paid insiders to help him fudge the records held by banks of their transactions and stowed away government securities. Banks whose name figured during the course of investigations included State Bank of India, Citibank and Standard Chartered. Harshad Mehta went on to allocate cash meant for settlements into several scrips, including ACC.
The year 2000 marked the euphoric bull markets for tech stocks with several global indices such as the Nasdaq moving up 550 per cent in less than five years. Indian markets saw several stocks being pushed into unreal territory and one of the reasons was Ketan Parekh. Parekh was another market manipulator who had a similar modus operandi to Harshad Mehta but at an estimated magnitude of Rs 6,400 crore.
He also differed from Harshad Mehta in that he was dependent on some bankers in the Global Trust Bank to lend him a huge sum of money which he proceeded to use to invest in stocks such as DSQ, Zee, Satyam, among other companies, and push their prices into stratospheric levels before dumping them on gullible investors and booking huge profits. Several companies are alleged to have lent or given him money to push their stock prices higher.
Ketan Parekh also used the FII route to speculate in stocks. He created entities known as 'Overseas Corporate Bodies' to route investments through tax havens such as Mauritius, making his trail harder to track.
Demat scam
Another recent scam whose modus operandi was very different from the earlier two was the 2006 Roopalben Panchal demat scam. Panchal and her family members looked to take advantage of the lack of monitoring and co-ordination of demat accounts in addition to a loophole in the IPO mechanism which enabled them to open and maintain over 10,000 demat accounts using a single official address.
The incentive to hold these accounts arose from the fact that the limited allocation available to high net worth individuals rendered it impossible for HNI individuals to get a significant slice of IPO action. Panchal and others applied under the regular retail investor category for which 35 per cent of the IPO shares were reserved. Armed with several thousand demat account under different identities, Panchal applied for a huge number of shares in IPOs that included Yes Bank and IDFC. The IDFC IPO scam is alleged to have involved 44,000 fraudulent demat accounts. Once shares were allotted to the demat accounts, they were transferred to Panchal's own accounts through off market transfers. Windfall profits were registered when the shares were sold on listing day when the buzz around the company was high. Panchal and the others were estimated to have pocketed Rs 60 crore through their operations.
The common thread linking the three instances is how retail investors were unable to resist the whirlpool of speculation and were drawn into buying shares at prices that were far from reasonable or lucrative.
Even more telling is the justification used by the operators to rationalise high prices. Harshad Mehta, for example, propounded a 'replacement cost' theory which stated that stocks during his time were undervalued. Panchal opening over a thousand accounts with a 'reputed' broker begs the question of how complicit was the system in enabling these acts. Ketan Parekh's money trail, which went undetected until stock prices collapsed, included money transfers of up to Rs 3,000 crore to brokers in Kolkata to execute trades on his behalf.
Keynesian Beauty contest
The three instances also highlight an interesting case of what is referred to as a Keynesian Beauty contest. A Keynesian beauty contest is one where the judge, rather than determining who he believes to be the winner of the contest decides to try and guess which contestant the other judges are likely to vote for.
Rising stock prices have a very similar effect with people hopping on to the bandwagon when prices are rising, hoping that another investor will be willing to hop on at a higher price for them to profit. As Keynes put it '… We devote our intelligences to anticipating what average opinion expects the average opinion to be…' As long as that remains the case, unscrupulous individuals are likely to find new ways to deceive the public.
Buy / Sell (Jul 30, 2010) Buy Sell Net FII 2666.19 2455.33 + 210.86 DII 1408.94 1538.91 - 129.97
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| *LTP stands for Last Traded Price as on Friday, July 30, 2010 4:04:57 PM |
#1R1 stands for Resistance level 1 @1S1 stands for Support level 1 |
| #2R2 stands for Resistance level 2 @2S2 stands for Support level 2 |
#3R3 stands for Resistance level 3 @3S3 stands for Support level 3 |
The levels given above are with respect to previous closing price on the NSE / BSE. |
Arvind Parekh
+ 91 98432 32381
