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Monday, Sep 20, 2004

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Upside likely ahead of reversal

B. Krishnakumar

NIFTY (1733.6)

Preferred view: The market sentiment remained distinctly bullish last week.

As anticipated, the index ruled firm and also moved closer to the target zone of 1750-1770 range mentioned last week. The near-term outlook appears positive and a move to the target zone appears likely.

On the flip side, the index is now into the W.D.Gann time zone of September 16-24 when a potential reversal of the trend is likely. Given that the index is likely to approach the resistance in the crucial time window, there is a case for expecting a reversal shortly.

In Gann parlance, the price is likely to square with time in the next few days. This could at least trigger a decline in the near-term. The earlier resistance zone of 1660 is likely to act as a support in the event of a decline. A breach of this level is likely to have further negative implications.

As observed in earlier weeks, there is a confluence of projected time reversal dates falling in the September 16-September 30 time window. Signs of weakness as the index reaches the price reversal zone could be used to take short positions with a close stop loss in place.

Comment: Except for a marginal weakness on Wednesday, the sentiment remained buoyant during the past week. With FIIs (foreign institutional investors) turning major buyers, the rally picked up momentum on Thursday and Friday. After a rising trend witnessed earlier, reports of a drop in inflation rate also fuelled the rally.

Though the index heavyweights ruled firm, the mid-cap stocks were in the thick of market action. Quite a few such as McDowell, KEC International, Tata Metaliks, Sesa Goa and Moser Baer attracted interest during the week.

The index is currently moving within the boundaries of an upward sloping channel. It is now ruling close to the upper part boundary of the channel. This credence to the view of a possible reversal in the recent bullish trend.

SENSEX (5561.6)

Similar to the Nifty, the Sensex too ruled firm and also moved to the target zone of 5500-5550 range.

The near-term outlook appears positive and a move to 5650-5700 range appears likely. The index is, however, likely to turn weak after touching this price zone. A move above 5980 would impart bullish momentum and also negate the possibility of a drop.

Comment: The key price indicators are approaching the overbought region on the daily charts. The 14-day RSI, for instance, is way past the 70-point mark and is perched at 81. Though this does not necessarily result in a weakness, it is not unrealistic to expect at least a slowdown in momentum or a sideways price action shortly.

In the weekly charts, it is interesting to notice that the RSI is yet to move into the bullish territory. Despite the recent bounce, it is still hovering around the 60-mark, which is a typical resistance level in a market that is weak. There would be an indication of a strong bullish undertone if the RSI moves past 70 on the weekly charts as well.

Given this backdrop, the price action over the next couple of weeks would be crucial. A bearish trend could emerge if the index closes below 5370 on Friday (September 24). This would be a textbook-fashion reversal sign in the classical style of technical analysis.

S&P CNX IT (2483.4)

Despite the strong overall bullish market sentiment, this index closed on a relatively weak note on Friday. The movement was, however, in line with last week's expectations. As anticipated, the index turned weak after a short-term rally. The near- term trend would be weak as long as the index stays below 2515. The immediate support is at the 2380-2400 range.

(Note: The analysis and opinion expressed in these columns are based on the technical analysis of the past price behaviour. Opinion and price targets are based on the Elliott Wave Analysis. The stop-loss level provided with the recommendation is important. The original view would stand negated if the stop loss level is breached. There is a risk of loss in trading)

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