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Tuesday, April 20, 2010

Is the correction in the Sensex over already?

Many small investors may be thinking about this question after the Sensex bounced up today after 5 straight down days. A simple 'yes' or 'no' answer will have 50% chance of success - but also a 50% chance of losing money if you bet on the wrong side.

In investing, one needs to tilt the odds in one's favour. The best way to do that is to keep yourself better informed and prepared. If you have made a proper investment and asset allocation plan then such ups and downs in the index should be ignored as mere 'noise'. The business channels and pink papers make a big deal out of it because it helps them to sell advertisements.

Let us look at the information available. The weekend's big news was the SEC fraud charges against Goldman Sachs. The quick denial by Goldman has not convinced any one. More such skeletons in the US banking and financial sector may come tumbling out. Asian and European indices had a sharp reaction.

The huge disruption in air traffic due to the volcanic eruption in Iceland caused discomfort and inconvenience to travellers. Import and export shipments also got badly affected. Clogged up trans-Atlantic air channels seem to be easing back to normalcy. The European markets greeted the news with good up moves.

Today, the RBI raised the repo, reverse repo and CRR rates by 25 basis points, which was along expected lines. How much it'll cool food inflation is debatable. But the market was apprehensive of a bigger 50 basis point raise. No wonder the Sensex shrugged off the rate hike.

Among Q4 results declared so far, Hero Honda came out with surprisingly strong results. Infosys and TCS have also reported good performances, though both are cautious about the outlook for this year - for two reasons. The appreciating Rupee, and the lack of big deals so far from the US and Europe markets.

The fundamentals of the Indian stock market seem to be in reasonably good shape, so there is no reason for the Sensex to drop any further. Right? I'm afraid not, because the technicals are getting a bit dodgy.

Yesterday, the FIIs were big net sellers, and the Sensex fell by 190 points. Today again, the FIIs were net sellers - but the Sensex went up by 60 points! What happened? The DIIs bought, and so did retail investors.

Yesterday, the Sensex took support at the 50 day EMA but was resisted by the falling 20 day EMA. Today, the index tried several times to move above the falling 20 day EMA, but failed. The technical indicators have also turned weak.

To cut to the chase, as long as the Sensex remains below the 20 day EMA, the correction is likely to continue. The support from the 50 day EMA was a positive, so watch the medium-term average closely. A fall below it could lead to a deeper correction.

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scorpio said...

You always post at the right time. I was in a confused state as to the bounce was good at 17300 levels. Your blogs are as always - eye openers :)

Subhankar said...

Appreciate your comments, Ashish.

I used to be just as confused by index movements! Every thing seemed so random and uncertain.

By learning to understand and interpret macro and micro economic concepts (just the basics is adequate for stock investing) much of the fog can be lifted.