If we don’t get a snap-back rally soon, things can be pretty ugly, especially below 15,300

In our previous issue, I had suggested that the short-term trend was down. At the time of writing that piece, the Sensex was at 16,860. Over the next two weeks of trading, the market has gone on to make fresh lows. It had crashed below 16,000 on the day of the credit policy (actual low point of 15,982) before strong buying by domestic institutions pulled the market up. Since then, it has oscillated between 16,100 and 16,500 till Thursday, 4th February. Then on Friday came huge panic selling in overseas markets and the Sensex ended down 434 points at 15,791.

Over the 10 trading days of the fortnight, the market was decisively up only on one day (3rd February). Most other days, it either went sideways or sharply lower.

A quick short-term rally is possible. If that does not happen, the Sensex is headed towards 15,300. That would inflict severe psychological damage and rallies thereafter would be really tough.  

The past fortnight was a period of huge volatility which more than made up for the quietness of the first three weeks of January. There was the credit policy of the Reserve Bank of India plus global issues (Greece’s debt problems followed by those of Portugal and Spain). Besides, the Asian markets were mostly down and China was seen to be tightening its monetary policy. All this gave fresh ammunition to the bears.

After the decline of the previous fortnight, the market looks precariously poised. Globally, investors are pulling out. As the chart shows, all major markets have been on a downtrend for a while. How much lower can the market go? Nobody really has a clue. While the bulls would argue that for India’s growth (7%-9%—take your pick), the market is cheap and liquidity is ample, this kind of macro reasoning has nothing to do with market movements. The bears talk darkly of a double-dip recession and sovereign debt crisis in Europe. We cannot see that far.
 
In fact, no matter what we think, the big guns among the global investors are all bullish about emerging markets, especially India. Which is why, unless there is new evidence of a crisis, we don’t think that a severe market crash is around the corner. At least, not yet. Not that anyone is talking about a crash; but then if everybody did, a crash would not happen anyway.

As for our forecasts, the short-term trend was already down. The medium-term trend has also turned down. Those interested in our views on shorter-term trend changes, don’t forget to look up the daily market forecasts on our website.

Short-term :        Down
Medium-term :   Down
Long-term :         Up