Saturday, February 14, 2009

Weekly Sensex Update

The Sensex continues to trade sideways in the rectangular band between 7700 and 10950 with two important differences from last week: we had a higher close for the week ending Friday Feb 13 as compared to the earlier week; and the trading range for the week was also in a higher band between 9300 and 9800.

The Sensex is still way below its 200 day EMA, which continues to move down and is currently around the 12000 level. That means we continue to remain in a long term bear market, and any up move will probably get resisted by the 200 day EMA.

The medium term average - the 50 day EMA - is beginning to flatten a bit. The Sensex closing level seems to be playing hide-and-seek with it. The shorter term average - the 20 day EMA - is starting to move up but still remains below the 50 day EMA.

But a couple of indicators are saying that the past week's higher close may be misleading. Firstly, there was no volume confirmation for Friday's higher close, as volumes were less than that on Wednesday and Thursday which were down days. Also, the slow stochastics are indicating an overbought situation.

In a sideways market, technical analysis becomes a difficult task because the market alternately gives buy and sell signals. Those who are experts at identifying short term signals (and yours truly definitely does not belong to that breed) are talking about different scenarios to try and explain the situation.

One is talking about either a 'bow-tie diametric' or an 'extracting triangle' depending on which level is broken on which day; another is talking about an 'inverse head-and-shoulders' or a 'descending triangle'. Needless to say these either-or explanations, swinging between bullish and bearish scenarios, are leaving investors confused.

As a long term investor, I've learned (the hard way!) to look at the macro picture and ignore the day-to-day gyrations in the stock market. What is the macro picture telling us?

Inflation is down, mainly because oil prices are down. Interest rates have come down a bit, but are still on the higher side. The government is likely to provide some more financial sops in the interim vote-on-account presentation (this being an election year). These are the positives, which enabled the bulls to get the upper hand last week.

The economy is still down in the dumps with the IIP at -2% and mounting job losses. The consensus GDP growth rate seems to be coming down slowly. Q3 results on the whole were not that bad because there has been top line growth but bottom lines have been affected. Q4 results are unlikely to be any better. I have a feeling that audited results after Q4 will reveal many more skeletons still hidden in company cupboards.

Most importantly, consumer and investor sentiments have taken a pounding and the FIIs are in no mood to plough back their funds - whatever may be left of it, with so many bank failures all around.

Bottomline? The bulls and bears are still undecided about the future direction of the market - so the sideways trend may continue for a while longer. At the risk of sounding like a broken record (guess they don't make those any more - but some how, a 'broken CD' just doesn't sound right!), sit this one out. Wait for a clear direction from Mr Market.

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