The Hindu Business Line : Corrective phase ahead

Preferred view: Though the index logged a weekly gain of 49 points, market activity was bereft of the strong momentum that was evident in the past few weeks.

Except for a sharp rally on Wednesday, the indices were confined to a narrow trading zone.

A decline in the daily trading range witnessed over the past three days is a sign of indecision.

The recent price patterns suggest that the index has got into a corrective phase. The index is likely to test the immediate support at the 2320-2330 range.

A close below 2320 would have further bearish implications and the index may drop to the 2260-2270 range.

The close above 2400 would result in the continuation of the earlier bullish phase and would also result in a delay in the start of the expected corrective phase.

Comments: The key indicators including the 14-day RSI and Commodity Channel Index support the possibility of a corrective phase ahead. Most indicators appear overstretched toward their upper extreme, warranting an adjustment either in the form a drop in price or a protracted phase of sideways price action.

Considering that the rally from the low of 1896 has been devoid of any significant correction, it is only natural that the subsequent corrective phase could see a significant retracement of the rally.

One of the tenets of Elliott Wave Theory calls for an "alternation" within the various corrective phases witnessed during a major move.

The implication of this tenet is that if the earlier corrective phase was in the form of a sideways movement resulting in a shallow drop, it would be in order for the subsequent correction to take the shape of a sharper decline. Taking into account the possibility of the index getting into a corrective phase, investors may continue to book profits, especially in the index stocks.

The long-term view of a rally to the 2550-2600 range is valid. Investors may consider fresh exposures as and when fresh "buy" signals are triggered.

SENSEX (7754)

Preferred view: The index moved to the target zone of 7750-7800 that has been mentioned in the recent weeks.

After touching a high of 7843 on Wednesday, the index went into a corrective phase.

The index is likely to remain stuck in a trading range or seek lower levels in the near term. A test of the immediate support level of the 7450-7500 range appears likely.

At the moment, only a close above 7890 would reinstate bullishness.

CNX IT (3025.95)

The index ruled firm and moved to the target zone of the 3040-3060 range mentioned in earlier weeks. The near-term outlook is weak and a drop to the 2950-2960 range appears likely. A close below 2900 would have major negative consequences for the index.

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