Smells like a bear market rally, it's time to wait & watch

Special to Firstpost

S&P CNX Nifty (5168.85): The price action this week resulted in a sequence of lower highs and lows, which is a sign of weakness. As highlighted in the past few weeks, there is nothing to suggest the reversal of the medium-term downtrend that has been in force since 8 November, 2010.

As emphasized in recent weeks, a move past the 8 July swing high of 5,741 would suggest reversal of the medium-term bearish trend. The failure of the CNX Bank Index to make any headway on the upside strengthens the bearish case scenario.

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Those itchy may wait for at least a breakout of 5,500 before committing fresh funds in the equity markets. The best trading and investment opportunities arise when the markets are pushed to an extreme.

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At the moment there is no indication that markets are at an extreme position to justify fresh long positions.

CNX Bank Index (9292.55): The index failed to clear the crucial resistance at the 10,450-10,500 range, which is sign of weakness. Friday’s fall below the prior swing low of 9,323 strengthens the bearish case scenario.

The index now has to move past the October 31 of 10,081 to negate the short-term bearish view. As long as the index trades below 10,081, there would be a strong case for a slide to the short-term support at 8,600. View Chart

Short positions may be considered on minor rally, with a stop loss at 10,120, for a target of 8,600.

State Bank of India (Rs 1,798.35): The sharp fall in the past couple of trading sessions suggests that the counter-trend rally of the October 5 low is complete. The short-term trend is bearish and the stock could ease to the immediate support at Rs 1,710.

From a medium-term perspective, the stock could slide to major support at Rs 1,610. Short positions may be considered on rally, with a stop loss at Rs 2,060, for a target of Rs 1,610.

Indraprastha Gas (Rs 429.85): After a brief corrective phase, the price action since 18 October suggests resumption of the medium-term uptrend. The stock could rally to the short-term resistance at Rs 465. View Chart

Long positions may be considered at the prevailing price as well as on weakness, with a stop loss at Rs 383. Profit in long positions may be taken at Rs 465. Those willing to play the waiting game may get opportunities to exit at Rs 505.

(The views and recommendations featured in this column are based on a technical analysis of historical price action. There is a risk of loss in trading. The author may have positions and trading interest in the instruments featured in the column.)