Late rally more of a corrective bounce

Sensex (14,424.87): The anticipated short-term bounce materialised during the week and the index posted a gain of 280 points amidst volatile trading action. The index is sandwiched between two crucial trigger levels of 14,700 and 13,770. A close above 14,700 would be an early indicator that a bottom of some significance has been established at 13,779; a drop below 13,770 would confirm the bearish view and the index could then drop to 13,400-13,450.

The price action in the next few weeks would provide critical clues about the medium-term trend of the market. The index has to move past the major resistance zone at 15,100 before concluding the resumption of the long-term uptrend. Going by the price patterns in index heavyweights, the recent rally is not convincing enough to suggest the resumption of earlier uptrend. It appears more in the nature of a corrective bounce.

As observed last week, the momentum behind the rally and the ability of the index to sustain at higher levels over the next few weeks would hold the key in determining the long-term trend. Until there is a clear indication of the next directional move, investors need to avoid big-ticket purchases.

Nifty (4,190.15): Though the expected short-term rally came about during the week, the index failed to close past the resistance level of 4,250 mentioned last week. The index is at a crucial juncture and the price movement in the next few weeks would hold the key to the medium-term trend. The index has to close past 4,350 to indicate that a major bottom is in place at the recent low of 4,002. On the other hand, a close below 3,980 would indicate that the index is on its way to the 3,500-3,550 range.

Key pivotals:

Tata Motors (Rs 657): The stock has been one of major underperformers in the recent months. The sustained fall in the recent months has pushed the stock deep into the oversold territory. The sharp bounce on Friday indicates that the stock is recovering from oversold levels and a move to Rs 710-720 may be likely. This view would be valid as long as the stock holds above Rs 620. Fresh exposures may be considered on weakness with a stop loss at Rs 620 and an initial target of Rs 710. A close above Rs 730 would indicate that the stock has resumed its long-term uptrend.

Tata Steel (Rs 583): The price movement was in line with expectations and the stock moved to the target zone of Rs 585-600 specified last week. The recent price action indicates that the stock is tracing out a “bearish flag” pattern. A drop below Rs 550 would confirm this pattern and would have bearish implications. The stock could drop subsequently to the Rs 500-510 range. Only a close above Rs 650 would indicate the resumption of uptrend. Have a stop loss at Rs 560 for long positions and pare exposures on rally.

BHEL (Rs 1,753): The stock was one of the top performers on Friday and played a crucial role in bolstering the index. The short-term outlook is bullish and a move to Rs 1,875-1,900 appears likely. A close above the crucial resistance level of Rs 1,790 would confirm this bullish view. Stop-loss for long positions may be placed at Rs 1,600. Fresh exposures may also be considered on weakness with the same stop loss.

Stock of the week:

Welspun Gujarat (Rs 228): After a sharp run-up in the early part of this year, the stock has been through a corrective phase in the recent weeks. This correction appears complete and the next leg of uptrend seems underway. A move to Rs 265-270 appears likely. This view would be valid as long as the support at Rs 203 is not breached. Go long at prevailing levels and on weakness with a stop loss at Rs.203. Use a trailing stop loss in the event of a swift move past the target zone.

(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)