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Sunday, Nov 28, 2004

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Nifty faces key resistance levels

B. Krishnakumar

NIFTY (1901.05)

Preferred view: The market sentiment remained positive last week.

The much anticipated downward correction appears to have been completed during Monday's trading. The index dropped to closer to the support zone of 1830-1835. After hitting a low of 1845, the index recovered and moved past the 1900-mark on Thursday.

The move past the trigger level of 1905 is a positive sign. The Nifty could now progress towards the 1935-1940 range, though a couple of key resistance levels would have to be breached.However, it is just a question of time before the Nifty again gets into a corrective mode. This would be in line with instances in the past when markets have moved into a corrective phase after an overstretched bullish phase. The subdued phase between January and May this year is an instance.

After a relentless upward move from the 920-mark to a high of 2014.65, the Nifty went into a corrective zone that lasted for nearly five months and ended on May 17 this year. A slowdown in momentum is an early signal of an impending corrective phase. There are such signs in the daily chart of the Nifty.

The recent recovery does not appear convincing in terms of the underlying strength of the upward move. There is evidence of waning momentum in the recent rally. The series of negative divergence between the Nifty and the 14-day RSI is a cause of concern.

Though the Nifty scaled moved past the 1915 mark on Thursday, the 14-day RSI has registered a lower high in relation to the previous high. A series of such divergence is not a healthy sign. While select large-cap stocks and several few mid-cap stocks may continue their upward march, the time to take profits, at least on a part of the holdings, may be close on hand.

Comments: The weak trend in the share price of Reliance Industries played a key role in pulling down the indices. Despite the clarifications issued by the company officials, the stock remained subdued during the week. The relatively weak trend in software sector stocks, too, did not help the Nifty. The recovery in old economy heavyweights such as Tata Engineering, ONGC, Maruti and Mahindra and Mahindra provided a cushion.

SENSEX (6035.03)

The index closed above the psychological 6000-mark during the week. As in the case of the Nifty, the recent upward move in the Sensex too appears to be devoid of strong momentum. The completion of a bearish "gravestone doji" pattern in the Japanese Candlestick chart is also not a positive sign.

Though the index could continue the upward move, a significant correction is due. A drop below 5850 would indicate the onset of a corrective phase. On the other hand, a move past 6100 would impart strength.

Comments: As observed in the earlier weeks, the market action was mid-cap centric while quite a few large-cap ones were devoid of any significant momentum. The spurt in the price of ITC, Tata Engineering and Mahindra and Mahindra were the key drivers of the index. The outlook for select large cap stocks such as Tata Tea, ITC and Hindustan Lever continues to remain bullish. The pharma majors Ranbaxy and Cipla, too, may soon move into a bullish mode.

S&P CNX IT (2879.4)

The index remained range bound during the week. After a weak trend on Monday, the index recovered ground strongly on Thursday. The relatively subdued trend has not negated the view of a rally to the target zone of 2950-2960 zone. The bullish view would be in force as long as the index holds above 2790. A drop below 2790 would negate the positive outlook and would also push the index to 2675-2680 range.

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