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Sunday, August 31, 2008

Sensex in a narrow band

For the past two weeks, the Sensex has moved sideways in a band between 14000 and 14700.  Friday's 500 point rally was 'resisted' by the 50 EMA. So what is interesting about this situation? It is another textbook example in technical analysis.

Those who understand and interpret Elliott Waves (and I'm no expert) may recognise that the fall from the top of 21000 in Jan '08 happened in 5 waves - three down and two up.  The Sensex then retraced to the 17500 level in 3 waves - two up and one down.

Again the Sensex dropped from 17500 to 12500 in 5 waves - three down and two up. This was followed by a 3 wave move up to 15500.  So from the Jan '08 top we had two down movements of 5 waves each and two up moves of 3 waves each.

Now we are into the 5th (and final?) down move from 15500. The drop from 15500 to 14000 is almost an exact 50% Fibonacci retracement of the last up move (i.e. 50% of 15500 - 12500).

The two weeks sideways movement indicates a pause or a consolidation before the next move. Such a sideways movement can be an 'accumulation' (stronger and smarter investors buying; weaker investors selling) or a 'distribution' (smarter investors selling and weaker investors buying) phase.

We won't know the outcome of this sideways phase till the Sensex breaks up above 14700 or down below 14000. But we can make some educated guesses based on the fundamental and technical scenario.

The macro scene isn't great. Inflation has dipped marginally but is still at 13 year highs. Oil prices have moderated, but this has been largely offset by the fall in the Rupee value. Interest rates continue to remain high. Falling industrial production figures don't provide much hope. On top of all this, a large number of rights issues and IPOs are waiting in the sidelines to hit the market. That will suck out a lot of liquidity - which is poor anyway.

To top it all, the technical indicators like the moving averages, MACD, stochastics are mostly bearish. So my educated guess is that the Sensex will break downwards from the sideways phase of the past two weeks and then test the previous low at 12500. It may even break 12500 and touch 10000 levels to complete the 5 wave down move from the Jan '08 top.

But the markets are known to do the exact opposite of what the 'experts' may interpret. Please keep an eye on the Sensex levels over the next week or two as the consolidation phase should come to an end within that period.

In the next few posts, I plan to short-list some stocks that can be put on a watch-list for buying. That means I will give adequate reasons why I like them - but you must do your own research if you do decide to buy.

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