Financial Daily from THE HINDU group of publications
Sunday, Aug 01, 2004
Markets - Technical Analysis
Short-term correction likely
Preferred view: The market action last week was not entirely on expected lines. The anticipated short-term correction turned out to be extremely short-lived. After a weak trend on a couple of days, the index turned bullish on Thursday and Friday. The near-term outlook for the index is positive. A move to the 1660-1670 range appears likely.
This, however, will not negate the earlier view of a drop to at least the 1450-1475 range. The entire upward move from the lows recorded in May does not appear convincing and strong enough to be considered as the start of a new bullish trend. The time taken by each swing to hit pivot high has increased progressively. This indicates that the lack of strength or momentum behind the rally, which is not a sign of bullish trend.
The 14-day RSI is still ruling at the key resistance level of 60-70. During a bearish phase, the indicator and the underlying price movement usually turn direction after hitting this resistance zone. Though the break above the high at 1626 is a significant positive development, it does not quite signal the start of a new upward move.
Comment: After weakness on Tuesday and Wednesday, the sentiment turned positive in the next couple of days. The flow of improved corporate earnings from top companies such as Reliance, Tata Motors, Tata Steel, ONGC and HPCL infused buying interest. This helped the index settle at higher levels at the end of the week.
Alternative view: The firm trend witnessed last week helped the index to break above the upper boundary of the trading range. However, as mentioned earlier, the recent recovery appears more of a corrective rally rather than the start of a new positive trend. As observed in previous weeks, the medium-term trend is bearish and only a move past 1750 would impart positive momentum. This would indicate that the decline that commenced at 2014 in January 2004 has been completed at the recent intermediate low of 1292.
Preferred view: Though the index logged a weekly gain of about 100-odd points, the momentum and the structure of the upward move is not very convincing. The ongoing rally is likely to meet with resistance at the 5260-5300 range. The index is likely to reverse direction after this anticipated short-term upside move.
A close above 5300 could help the index test the next resistance level at the 5400-5450 band. However, the possibility of a rally to 5400-5450 appears relatively remote and a significant correction is likely to materialise before any significant upward trend can take shape.
Comment: The strong growth in earnings reported by the manufacturing companies as well as the ones in the commodities sector imparted buoyancy. Reliance and quite a few PSU refinery stocks settled at higher levels. Steel producers including Tata Steel and SAIL were other noticeable gainers.
Alternative view: While the index is expected to test the 4228-level, a move past 5500 would be an early sign of the reversal of the downtrend. As iterated in earlier weeks, the expected weakness will not, however, negate the long-term positive outlook for the market.
S&P CNX 500 (1351.45)
Preferred view: Similar to the other major indices, CNX 500 too ruled weak for a couple of days and recovered sharply towards the end of the week. The overall pattern and outlook for the index is similar to the Nifty and Sensex. After a short-term rally, a drop to the 1220-1230 range appears likely.
CNX IT (2269.2)
Preferred view: The overall chart pattern is slightly different for the CNX IT index. It has moved past quite a few key resistance levels last week. The index is likely to rise to the 2350-2360 range and turn weak thereafter. Drop below 2200 would mark the start of a short-term downtrend.
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