Indian stocks, already down $16 billion in market capitalisation in 2004, are bracing for further falls as the benchmark index is set to breach a key support level, analysts said on Friday.
The Bombay top-30 index is down 4.1 percent in 2004, spooked by supply fears as a $3 billion IPO blitz hit the market. That has erased some of last year's 73 percent gain which rode the record $6.7 billion foreign investments into Asia's second-best performing bourse.
"We could have a short term pullback from the 5,560 levels, but after a brief rebound the index is headed for the 4,900-5,000 zone," said Vignesh Eswar, strategist at Furinkazaan Stock Trading, referring to a bearish descending triangle pattern.
A descending triangle pattern is formed when a stock's highs are declining but the lows remain flat, indicating that the bulls were getting exhausted while the bears were holding out.
The target is calculated by deducting the triangle's height from the base, in this case 5,560 points.
The Bombay index was down 0.8 percent at 5,603 points on Friday afternoon.
Analysts say the steep nine-month rally that began last May had reversed its intermediate trend after hitting a life high of 6,249 points in January. Subsequent recoveries were short-lived and on falling volumes, implying weakness, they said.
"All indicators are suggesting more declines for the market," said Jitendra Gupta, chartist with Pranav Securities, adding that the downside would be severe if the crucial 5,560 support level did not hold.
"The RSI has turned negative for the first time since last May, there is a bearish moving average cross-over and on the candlesticks chart we had a powerful evening star pattern."
Moving averages are used by chartists to detect market trends and when the short-term average crosses the long-term average from above and both averages are pointing downwards, it is an indication the trend has turned negative.
The Relative Strength Index (RSI), which measures market momentum, is considered to be in negative territory when it falls below the 30 percent mark.
Besides a target for the triangle pattern, the 4,900-5,000 points zone was also an important retracement level and would provide a strong support, analysts said.
"It is a 38.2 percent retracement of the nine-month rally as well as the 200-day moving average projection," said G. Devanathan, strategist at Kantilal Chhaganlal Securities. "But at that point it will be a great buying opportunity."
According to the Fibonacci retracement theory, a major rise or fall is followed by a corrective move in the opposite direction with support or resistance at levels marking 38.2 percent, 50 percent and 61.8 percent of the original move.
Among individual stocks, analysts were bearish on petrochemicals giant Reliance Industries, India's second-most valuable company.
"It will form a head-and-shoulder pattern if it falls below 540 rupees and that could lead to a huge fall," said Vijay Bhambwani, CEO of investment advisors BSPLindia.com., who has a target of 470 rupees for the stock.
That pattern is a powerful reversal formation with three distinct bottoms and a neckline. The formation is complete when the index falls below the neckline and the target is calculated by deducting the distance from the head to the neckline.
Reliance, which has the highest weighting of 14 percent in the Bombay index, was trading 1.6 percent down at 556.20 rupees on Friday afternoon.