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Sensex (16649.64): A bearish trend prevailed and the market sentiment was dented by a relentless surge in the price of crude oil and attendant concerns on inflation. There are a couple of key technical developments this week that suggest that the bullish forces are losing control, at least from a short-term perspective.
The inability of the index to clear the resistance level of 17364 is the primary cause of concern. For the second time in succession, the index has failed to clear the 20-week moving average, which is also the middle line of the Bollinger Band; this moving average is now positioned at 17162. The index has to clear this moving average to indicate the resumption of the bullish trend.
The second negative factor is the breach of the support zone at 16700. These two events indicate that bullish forces are losing control. A drop below the recent swing low of 16546 would indicate that the index is headed towards the support zone at 16150-16250; a close below 16150 would indicate that the index is headed towards sub-15000 levels.
The market is headed towards a crucial week and price action this week would determine the medium-term trend. The chances of a rally to 18150 would be alive if the index manages to hold above 16200.
Nifty (4946.55): The bearish trend that prevailed during the week has pushed the index closer to the bearish trigger-level of 4910. A close below this level would result in a test of 4700-4750.
Recent price patterns suggest that the index would soon get into a strong trending phase and a close below 4910 could trigger a sharp downtrend. On the other hand, a close above 5150 would be an early sign that the uptrend is gaining strength. It would be prudent to wait for market action to unfold before taking a directional call or committing significant funds.
While the short-term outlook appears muddled, let us step aside and look at the bigger picture from an Elliott Wave perspective. The rally from the recent low 4468 does not appear to be a new “impulsive” structure in Elliott Wave parlance. What this means is that the recent rally is corrective in nature and the index could retest or even slide below the January lows of 4448. As observed in earlier weeks, a slide to 4250-4300 remains the preferred long-term view and the expectation was that the index would rally to 5500-5600 before the eventual slide begins.
The way things have panned out over the past few weeks suggest that either the fall towards 4250-4300 has already begun or we may probably see more of a ranging price action with a moderate upside bias before the eventual capitulation happens. Either which way, we are not of the woods as far as the medium- or long-term trend is concerned.
CNX IT Index (4390.15): After having registered a low of 3378 in March, the index has moved up smartly over the last couple of months and touched a high of 4620 on Monday. The recent uptrend appears complete and the index could get into a short-term corrective phase.
A drop to the immediate support zone at 4100-4150 appears likely. After years of underperformance in relation to the Sensex, Nifty, recent price action indicates that the IT index would continue its relative outperformance in the short to medium term. Investors may use price weakness to include frontline and select mid-cap IT stocks in their portfolio.
Key pivotals:
State Bank of India (Rs 1,573.25): Stocks from the banking sector took a pounding last week. Price action in the banking index and frontline stocks indicates that there is more room on the downside. The stock could drop to the major support zone at Rs 1,300-1,350. Investors may use price rally to pare exposures; fresh short positions may be considered with a stop loss at Rs 1,720.
Cairn India (Rs 306.45): This has been one of the top performers in recent weeks. The spurt in price has pushed the stock into a short-term overbought zone and the stock is now in a corrective phase. It could drop to Rs 275-280 in the short term. Traders may use price rally to take short positions with a stop loss at Rs 339. Positional traders may look for fresh entry opportunities at or near support zone.
Maruti Suzuki (Rs 790): The stock ruled weak in line with the overall market sentiment. This has pushed the stock closer to the support zone of Rs 750-755. Long positions may be considered on weakness with a stop loss at Rs 750 on daily closing basis. A close below Rs 750 could lead to a test of Rs 680-700. A stop-and-reverse strategy may be considered on a close below Rs 750.
Stock of the week:
Praj Industries (Rs 205): Though the stock was covered in this column a few weeks ago, price patterns are compelling enough to justify coverage in such a close succession. The medium- and long-term outlook is bullish and the stock could move to Rs 295-300 after a short-term corrective phase.
The stock could drift to lower levels of Rs 175-180 in the near term. Such price dips would be an opportunity to buy as the long-term outlook is positive. Stop loss for long positions may be placed at Rs 160.
(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)