Bearish Key Reversal in Equity Market - Sainik

There was plenty of good news all around the past fortnight, with the successful conducting of the Commonwealth Games, despite Don Quixote ( Kalmadi) and his cohort Sancho Panza (Bhanot).

The build-up to the Coal India IPO’s opening Monday was huge as was its size, at Rs 15,500 crore size, which made it the single largest IPO in India ever. The response is likely to be humongous, with an investor-friendly price band and retail discounts.

The flip side, however, is that it is that policymakers are getting nervous of the relentless flow of foreign capital. Last week saw even Singapore putting restrictions on foreign capital, thereby joining the bandwagon of countries, ranging from Brazil to Thailand, that are shunning foreign money. India seems to be the odd man out, considering we liberalized the rules for foreign capital inflows in to debt markets just a while back.

The Nifty and the Sensex created new highs, touching values not seen since January 2008 when the Great Indian Bubble burst. Interestingly, both the major indices closed in the red (week on week) for two consecutive weeks. This has not happened since end-April to early-May 2010.

Another point of concern is the major indices have made bearish key reversals on a weekly basis, for the first time since many years. The weekly key reversal is a very rare occurrence and it usually happens at major turning points..

Our definition of a bearish key reversal is when the index makes a new high over the previous time period, but closes below the close of the previous time period.

For instance, for the week ending October 8, the Nifty closed at 6103, after making a high of 6223 and low of 6067. During the week ending October 15, the Nifty made a new high of 6284 and a low of 6050 and closed at 6062. This is a classic key reversal.

More often than not, the effect of a key reversal is that the market continues in the direction of the prevailing short-term trend. In the case of Nifty, we should expect markets to continue to go lower, while the case of dollar, we should expect it to go higher. We should keep a close watch on what unfolds in the week to come by.

Both the bank and tech indices too had weak closings. In spite of good results from Infosys, the scrip tanked Friday with the highest volume seen in a very long time.

The result season will be in full flow in the next few days. Early indications suggest that the market is unforgiving and it goes down even if the results are good, so God help if the results are bad. Cement companies are likely to feel the heat, since they will uniformly come with not-so-good results.

Interesting times lie ahead.

While the fund flow from the FIIs continues unabated, Friday showed some slack, with FIIs being net sellers for the first time in eight weeks. With an imminent fund crunch upon us, especially, with the Coal India IPO, we have to closely monitor this area as markets are very vulnerable at this point of time. While we indulge in festivities, it is prudent to keep one eye firmly on the markets.