Uptrend will resume after correction

Investors may reduce exposure in frontline stocks

Sensex (18419.04): After a relentless upward move up, the index appears to be pausing for breath. The increased volatility and sharp gyrations witnessed during the last week indicate that the index is in the process of establishing a short-term top. Quite a few index heavyweights appear overheated and could see a meaningful correction before the resumption of the next leg of uptrend.

In the current scenario, the risk-reward equation is just not favourable enough to justify fresh exposures in frontline stocks. Attractive buying opportunities will resurface when the market corrects to lower levels. 

Though there is an intermediate support at 17600-17700 range, a test of the more crucial support at 16700-17000 is the preferred view. As observed in earlier weeks, the long-term trend is bullish and the index would resume the uptrend on the completion of the expected corrective phase. The index is on course to move to the target zone of 19500-20000.

Nifty (5428.25): The market action was marked by huge bouts of volatility during the week. The situation is ripe for a short-term correction and there are quite a few support levels that the index can lean onto in such a scenario. The immediate support is at 5250-5300, followed by 5000-5100. A test of the lower support zone is the favoured view in the short term.

Investors may reduce exposures in frontline stocks or have a tight trailing stop loss to lock-in unrealised gains. The next of the rally towards the target zone of 5900-6000 would commence on the completion of the anticipated short-term correction. The long-term bullish view would be under threat on a close below 4650.

CNX IT Index (4877.85): The market appears to have been disappointed with the second quarter earnings of Infosys Technologies and this took a toll on the IT index. Though the index took a knock on Thursday, the near-term outlook for the index does not appear too bearish if the chart patterns are any indication.

The index could move to 5300-5340 range as long as the bearish trigger level of 4680 is not breached. The medium-term trend would turn bearish only on a close below 4200. Investors need to a keep a close tab on stocks from the IT sector as they could spring a surprise. 

Key pivotals:
Mahindra & Mahindra (Rs 829): This stock has been a major underperformer since December 2006. While broad market indices have been on a roll, the stock has been in a major corrective phase over the past few months.

This phase of underperformance appears complete and the stock could seek higher levels of Rs 1,150-1,200 in the medium term. There is a strong support at Rs 745-760 range and investors may use price weakness to buy the stock. The bullish view would be negated on a close below Rs 670.

Bhel (Rs 2,341):  This has been one of the top performers and has played a key role in propelling key market indices to higher levels. The recent rally has pushed the index deep into the overbought zone. Considering that the index has reached overbought territory right at the resistance zone of Rs 2,450, the stock could get into a short-term corrective phase.

The immediate support is at Rs 2,100-2,150 range and the more crucial support is at Rs 1,900-1,950. Price weakness could be used to accumulate the stock as the long-term trend is bullish and the stock could move to Rs 2,700-2,750 after the completion of the short-term correction.

Reliance Communication (Rs 718): The outlook is bullish and a move to Rs 790-800 appears likely. A move to this target zone would commence after a brief short-term correction. The immediate support is at Rs 650-660. Accumulate the stock on weakness, as the long-term outlook is bullish. The trend would turn bearish on a close below Rs 580.

Stock of the week:
Tata Sponge (Rs 227): The long-term trend is bullish and a move to Rs 270-280 appears likely. The rally to this target zone is likely to commence after the completion of a short-term corrective phase. The immediate support is at Rs 220-225 and the more important support is at Rs 199-205. Gradually accumulate the stock on weakness with a stop loss at Rs 195.

(Note: The analysis and views expressed in this column are based on the technical analysis of historical share price action. There is a risk of loss in trading. Views and targets are arrived at by using the Elliott Wave Theory and Point & Figure technique. The author does not have investment exposure in the stocks discussed above. Comments and feedback may be sent to bkrish16@gmail.com)