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Pre-Budget market bears sexy Sensex

Biju Samuel in Bombay

"Sensex is sexy," says an exasperated stockmarket analyst, half in jest at India's premier share index's recent gyrations. "It could give Bollywood queen Madhuri Dixit a complex."

From the 2700 level on November 30, 1998, the Sensex touched 3515 on January 11, 1999. Thereafter, the market took an abrupt turn southward marked by confusing fluctuations.

Further evidence: on January 18, the Sensex crashed to 3198 tempting the bears to go short, only to land them in panic later, and they did a U-turn thereafter. However, by January 27, the index touched 3400, raising hopes of the bulls. But the euphoria was short-lived -- the market plummeted again.

The week beginning February 8 revived the bears' spirits again as the Sensex pierced the earlier bottom of 3198. The next day, the market refused to continue the plunge and in fact witnessed a rally, proving the theory right that when the market shows reluctance to fall further after breaking a meaningful bottom, it is bound to bounce back to the previous peak.

Last Wednesday's 100-point surge by the Sensex, over talk of expectations of good results of Hindustan Lever, fizzled out during the remaining two sessions of the week.

Now what does this recap of the Sensex gyrations indicate? It creates doubts if there is really room on the upside. It is also apparent that the market resists movement beyond the 3400 level.

Which means the week beginning February 15 is likely to witness similar gyrations.

One puzzling question being asked is whether the market has already scaled the highest peak of the bull run at 3515 five weeks back. This is best answered with the help of the Relative Strength Index. RSI is a technical indicator which measures the strength or weakness in the price movement of shares by comparing it with the RSI movement.

It is said a new rally is rarely terminated without a divergence between the Sensex and the RSI. A negative divergence is said to have developed when the Sensex scales a new peak when the RSI shows a lower peak.

When the Sensex was at 3515, the RSI was at an overbought level of 80 which was a new peak for the move. The absence of divergence indicates that the uptrend did not peaked at 3515 -- a higher peak beckons Sensex, at least till the RSI develops a negative divergence.

So, will the next rally see the Sensex reaching a higher peak that could be the highest? In the week ended Friday, the RSI hit a low of around 47 following the decline in the market. In order to create non-divergence (that is, to move to a new high), the RSI has to gobble up nearly 35 points.

At this juncture, it appears that even if the Sensex rises by 400 points, the divergence set-up cannot be avoided. Only a surge of unusual proportions can propel the RSI to a new high, resurrecting the earlier-conceived bull market.

(In January, the resurgent phase had all the signs of new bull market. But the market reaction to the 3515 peak was so strong against the shares both price-wise and time-wise that it undermined the bull market structure. The bull run, as it turned out, was but a mini-bull run whose final surge is yet to come.)

So, it is unlikely that the RSI will scale a new high. If divergence means termination of an uptrend, the logical course then is the start of a new declining phase.

Going by the Sensex close of 3337 on February 12, the current rally is expected to fizzle out in the early part of next week after reaching the 3400 level. From there, the Sensex is expected to nosedive to the previous bottom levels in and around 3200-3150, and then, bounce back to a new high beyond 3515, only to get into a larger declining phase thereafter.

If the rally to the level beyond 3515 happens before the Budget, the start of the bear phase is expected to coincide with the Budget.

The writer is a Bombay-based stockmarket strategist

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