Sunday, June 7, 2009

Stocks to buy : Banking

The indices improved for the thirteenth successive week, as the indices closed past the highs attained after the election result day as the Sensex (^BSESN : 15103.55 +94.87) gained 3.27% and the Nifty (^NSEI : 4586.9 +14.25) ended 3.10% in the last week. The Sensex closed past the earlier minor top of 14,931 and the Nifty has moved past the minor top of 4,509.40 and are now headed towards the next important resistance zone of 15,300-15,700 for the Sensex and 4,650-4,800 for the Nifty. The resistance zone of 15,300-15,700 has been derived from the Gann Fan line drawn from the 2008 highs on the Sensex. This is the last Gann Fan line and this is the last important resistance zone. Like wise the zone between 4,650-4,800 is an important resistance for the Nifty. The current intermediate rise has been intact since March 6 and is quite mature. The indices and scores of stocks have closed past their earlier intermediate tops in the current intermediate uptrend, confirming that the major trend is up.

Of the sectors, the BSE Consumer Durable sector was the largest gainer, ending 9.89% higher and was followed by the BSE Capital Goods index, which gained 8.40%. On the weaker side, the BSE Oil and Gas sector ended 0.92% lower and was the weakest. The next to follow was the BSE Bankex, which lost 0.92%. Bullish activity was seen in the mid cap and small cap stocks and the CNX Mid Cap index ended 6.15% higher and the BSE Small cap index gained 7.88%. As the indices have moved up on almost all the days in the last week, the targets for the Sensex and the Nifty to drop into an intermediate downtrend are far away and are at 13,518 and 4,092 respectively. The equivalent target for the CMX Mid Cap index to drop into a fresh intermediate downtrend is at 4,954. These targets are far away and a minor decline followed by a minor rise will raise these targets.

The strong intermediate rise was totally unexpected and a majority of the traders and investors were left out and are currently waiting for the indices to correct before they look for long positions. In such a case, we could see a sideways correction at resistance zones suggested above and a breakout from this resistance zone will result in higher levels. Usually in an intermediate correction, the indices correct by 38.2% to 50.0% and once this correction is over and the indices start a fresh intermediate uptrend, position traders and investors can get scores of opportunities, especially in stocks, which have exhibited good relative strength. If this happens, the next target for the indices will be the highs made in 2008. On the other hand, as expected in the budget, investors and traders are disappointed. The intermediate correction could continue and the indices could exhibit a correction from 50% to 61.8% of the recent rise.

Under these conditions, it is important for investors to wait for a correction, which could be a sideways correction or a bigger intermediate decline, as suggested and get into stocks and sectors, which have exhibited strength in the current intermediate rise. I will discuss some of the stocks, which have exhibited strength and investors must look to buy when the next intermediate correction in these stocks ends.

Bank of Baroda

Bank of Baroda has retraced more than 70% of the earlier decline in the bear market and is consolidating sideways between 400 and 450. A drop below 400 will result in the start of an intermediate correction and will result in the stock pulling back towards the support of 350, which was the gap created between 348 and 396 on the election result day. This gap will act as a support to the decline for the stock and also for the indices. A higher intermediate bottom in such stocks, which are exhibiting a strong relative strength, must be used by investors to pick up long positions.


PNB is one of the few stocks, which has retraced all the declines seen in 2008 and has made a high of 717 while in 2008, the highs made by the stock was 721. This is the sign of strength and a higher intermediate bottom by the stock in the next intermediate correction must be used by investors to pick up long positions in the stock as the next intermediate rise by the stock will result in a new high by the stock. The stock is currently moving just above its 20 DMA and a drop below 628 will result in the stock drifting towards the support of 585. Use the next intermediate correction to pick up long positions in such stocks.

Union Bank

Union Bank is another stock in the PSU banking sector, which has exhibited strength and has retraced more than 75% of the earlier bear market decline. The indices have retraced just above the 50% mark and hence the stock is exhibiting a bullish strength. The stock has a support at 201 and 195 and a drop below 195 will result in the stock drifting towards the support of 175. Use the next intermediate correction to pick up such stocks, which are exhibiting strength.

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