Signs of some short-term strength

A close past 14800 would be an early sign that the next leg of the rally is underway

Sensex (14401.5): The market action was in line with expectations and a bearish trend prevailed last week. After weakness for the best part of the week, Friday’s price action is encouraging. The occurrence of bullish reversal day pattern in the daily time frame is a sign of short-term strength. It is also positive to notice that the index has bounced off the support zone of 14150-14400 mentioned last week.

The price patterns and the extent of fall witnessed in recent days have satisfied the minimum requirement for the downward corrective process. Before turning bullish from a short-term perspective, it would be prudent to wait for further confirmation that a bottom is in place at Friday’s low of 14136.

A close past 14800 would be an early sign that the next leg of the rally is underway. The more important requirement is that Friday’s low of 14136 should not be breached for the recovery process to gain momentum. The downward momentum would gather steam if this low is broken. The medium-term bullish view would be under threat if the index trades below the swing low of 13727.

Though the medium-term bullish view and the possibility of a rally to 15500 are still intact, the index has to stage a meaningful recovery soon to provide credence to this view. As stated in earlier weeks, investors need to stick to fundamentally sound companies and should devise a methodology to capitalise on the volatile price action.

Nifty (4327.45): The index ruled weak as expected last week. The price action on Friday has resulted in the formation of a bullish key reversal pattern. This is a sign of strength and the index has to make a steady move up to confirm that the next segment of the uptrend is underway.

A close below the Friday’s low of 4248 would suggest that the downward corrective process is incomplete and the index could then drop to 4150-4200. A decisive overhaul of 4370 would suggest that the index is headed towards 4700-4750. As always, it would be a safe strategy to wait for the price action to provide clues of the next major move before committing significant funds.

CNX Bank Index (5776): Stocks from the banking sector were battered for the second week in succession. The completion of a powerful “triple crown” reversal pattern (described by Derrik Hobbs in his book Fibonacci For The Active Trader) is a bullish sign.

Though there is a case for the completion of the recent downward move, investors may wait for follow-up buying action in the next few days before taking positions in the sector. A drop below 5648 would indicate that the downward trend is in force and the momentum behind the fall would accelerate subsequently. This would also put the medium-term bullish view under threat.

Key pivotals:
State Bank of India (Rs 1,346.3): The stock moved in line with expectations and also tested the support zone of Rs 1,346-1,400 mentioned in earlier weeks. The stock could move to the near-term target zone of Rs 1,450-1,475. Long positions may be considered on a move past Rs 1,365 with a stop loss at Rs 1,305. A move past Rs 1,440 would suggest that the next segment of the medium-term rally is underway.

Hindustan Unilever (Rs 245): This stock has been one of the silent performers over the past few weeks. It has appreciated by about 30% in the last three weeks without much fanfare. The short-term outlook is bullish and a move to Rs 275-280 appears likely. Long positions may be considered on weakness with a stop loss at Rs 229. A trailing stop loss may be used in the event of a move past the target zone.

Tata Steel (Rs 595): The stock is hovering close to the long term support zone of Rs 550-575. There is a case for a rally to Rs 725-750 and beyond as long as the support zone at Rs 550-575 is intact.

Long-term investors may build exposures at current levels and on weakness with a stop loss at Rs 545. A close above Rs 635 would indicate that the stock is headed towards the target zone of Rs 725-750.

Stock of the week:
Hotel Leela (Rs 32.5): Stocks from the hospitality segment have been attracting interest of late. This stock, too, has seen a pick-up in trading volumes and a spike in price on Friday. Price patterns suggest  the stock could move to Rs 41-43 in the short term.
Long positions may be considered at current levels and on weakness with a stop loss at Rs 28.5 on a daily closing basis. Take partial profits at the first target zone and a trailing stop loss may be used in the event of a move past Rs 44.

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.