Friday, March 21, 2008

Will the bulls be able to win the battle?

The Indian stock markets are shut between March 20 and March 23, 2008. With the long week end ahead it’s now time to ponder over what can possibly happen to the Nifty and its constituents in the days to come.

The Hindu Businessline reported on Thursday: “The 75-basis point rate cut by the US Federal Reserve boosted sentiments across Asian markets on Wednesday, but the Indian bourses could not sustain gains. Lower opening of the European markets and more bad news such as poor growth in six core infrastructure sector in the domestic market pared early gains.”

Well, the Nifty registered a low of 4469 on Tuesday, just 20 points more than the previous low of 4449 (this number is being watched by most web sites/analysts/traders etc.) While we still don’t see any reliable reversal signs yet on daily charts, one can observe a “bearish pennant” formation, which is a continuation pattern.

To know more about this chart pattern, please click here.

It can be seen from the chart that the pennant formation appears to be very reliable since it has been formed after a steep decline or “pole”. A pennant is a small symmetrical triangle that begins wide and converges as the pattern matures (like a cone) and once the support trendline is broken (in case of bearish pattern) it confirms the breakout. This of course occurred on March 3, 2008.

The technical target for this formation is arrived at after subtracting the pole height from the breakout point; in this case the target works out to 3220.

So, technically the bears appear to have control over the Nifty.

Let’s now discuss some of the index stocks.

ABB: A symmetrical triangle formation is observed and a downside breakout occurred on March 17. The horizontal support was breached earlier on March 10.

ACC: Like the Nifty, the pennant formation occurred on March 3.

Ambuja Cement: A neutral rectangle pattern is observed; however, its support at 109 was broken on March 17 when the stock hit a low of 96.

Bharti Airtel: It formed a bearish “head and shoulder” pattern during January 2008 and the stock is currently trading below the “neckline” at around 840. This neckline will act as a strong resistance when stock attempts move higher.

BHEL: A bearish “double top” formation has occurred.

Cairn: A bearish “flag” pattern is seen. Though the stock breached the upper resistance trendline, it is not all that significant. A close below 207 will confirm bearish breakout.

DLF: It is very bearish and has already lost around 50% since January.

GAIL: “Pennant” formation is in progress; breakout awaited.

HCL Tech: Like ABB, a symmetrical triangle with bearish breakout is observed.

HDFC: A symmetrical triangle was formed and bearish breakout occurred on March 10. It has now broken the previous low at 2200.

Hero Honda: It has closed below the support at 662.30 and one may expect further bearishness.

LT: It is now trading below the critical support at 2957. The bearish breakout on March 10 was accompanied with huge volumes; The stock is headed towards lower levels.

ONGC: Bearish breakout occurred on March 3 after pennant formation.

PNB: The stock closed below the medium term support trendline on March 7. It is bearish in weekly charts as well.

RCOM: A bearish “double top” formation occurred in January and the stock is attempting to test the support level at 465.75.

Reliance: Like Nifty, bearish breakout occurred after pennant formation on March 3.

SAIL: This stock had a bearish breakout when it closed below the support trendline on March 13 with a full downward gap.

Tata Power: Bearish breakout occurred from symmetrical triangle pattern on March 7.

Tata Steel: Bearish flag formation completed and a downside breakout occurred on March 13.

TCS: Bearish breakout occurred from symmetrical triangle pattern on March 3.

With the formation of many confirmed bearish chart patterns in majority of the index stocks, the bears are most likely to emerge as winners in the short term.