A larger correction is on the cards

Sensex (14141.52): The weakness across global markets took a toll on domestic market sentiment. The index dropped 5% last week and also breached the crucial support level of 14,500-14,550 mentioned in earlier weeks. The weekly close below this support zone indicates that the recent fall is morphing into a correction of a larger magnitude.

Recent price patterns indicate that the Sensex could drop to the immediate target zone of 13,400-13,500 and could eventually test the next crucial support zone at 12,400-12,600. Only a decisive overhaul of the bullish trigger level of 15,100 would indicate that the long-term uptrend is still intact.

A close above 15,100 would indicate that the index is on course to move to the target zone of 16,800-17,000 before the end of this calendar. On the contrary, a drop below Friday’s low of 13,779 would confirm that the index is into a prolonged corrective phase.

Though the test of the support zone at 12,400-12,600 is the favoured view, it would be prudent to wait for price action-based confirmation. The index is now at an oversold region and is poised for a sharp pull-back. The momentum behind the pull-back rally and the ability of the index to sustain at higher levels would hold the key in determining the long-term trend. As mentioned in earlier weeks, investors need to be cautious and take profits or reduce exposures on pull-backs.

 Nifty (4098): The breach of the trigger level of 4,100 indicates that the trend is bearish. The recent fall has pushed the index into an oversold position and a corrective rally could be a distinct possibility. The index has strong resistance at 4,230-4,250. A close above 4,250 would indicate that the long-term trend is bullish and a move to 4,700-4,750 may materialise. On the contrary, a close below 3,980 could lead to test of 3,450-3,500 range.

Key pivotals:

Reliance Industries (Rs 1,751):  The stock bounced off the strong support zone at Rs 1,650-1,680 on Friday. There is a possibility of a short-term bounce to the immediate resistance zone at Rs 1,810-1,830. A close above Rs 1,830 could push the stock to Rs 1,860-1,880.

Reduce exposures on rally, as the stock could re-test the support zone of Rs 1,650-1,680 on the completion of the anticipated short-term uptrend. A close below Rs 1,680 could result in a prolonged phase of correction. Only a close above Rs 1,920 would reinstate long-term bullishness.

Tata Steel (Rs 543): This stock was one of major casualties of the market carnage and shed 14% for the week. This has pushed the stock to an oversold position.
A short-term corrective bounce may be round the corner and a rally to Rs 585-600 appears likely. Reduce exposures on rally as the stock is in a downtrend and could drop to Rs 500-510.

A close above Rs 650 would be a prerequisite for resumption of the uptrend. 
Larsen & Toubro (Rs 2,300): There is a strong support at Rs 2,230-2,250 and the long-term trend would remain bullish as long as this zone is not breached. A close below Rs 2,230 could lead to a drop to next support at Rs 2,030-2,050.

Have a stop loss at Rs 2,230 for long positions. Fresh exposures may also be considered on weakness with the same stop loss. Reduce exposures on a rally to Rs 2,415-2,430 range. A close above Rs 2,540 would indicate that the stock is on its way to new highs.

Stock of the week:
Bongaigaon Refineries (Rs 55.8): The stock has been one of the top performers in recent weeks. Price patterns indicate that the uptrend is not complete as yet. A move to Rs 63-65 appears likely.

The stock is likely to move to this range on the completion of a short-term corrective phase.

The positive view would be valid as long as the support at Rs 49 is not breached. Fresh exposures may be considered on weakness to the support zone at Rs 52-54 range with a stop loss at Rs 49.

(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. bkrish16@gmail.com)