When stock prices are rising regardless of market uncertainties, the stock market is said to be climbing a wall of worry and we expect the same to play out in the coming weeks based on the current technical signals. The markets ended May on a volatile note in line with the historical trend for that particular month. The 30-share Sensex began the month on a euphoric note at 17,600 levels only to correct from then on and end close to the lowest point at 16,400. The damage this time around has not been as severe as in the past few years and can be described as a healthy time-wise consolidation phase.
By rebounding repeatedly from the level of 16,200 last week the Sensex followed the “Fibonnaci” study as the support happens to be the crucial 50% retracement of the entire rise from 14700 to 17700. On most technical indicators the indices are deeply oversold thereby limiting the downside. We believe the fall in the recent past is a part of the bigger uptrend that should be used as an opportunity to create medium-term long positions.
Pattern Set-Up: On the current index chart two important patterns can be spotted, an outcome to which is likely in the month of June ’08. Firstly, on the bullish side the Nifty has been moving within a downward sloping “channel” for the last six weeks and is currently at the lower trendline of the same as presented in the chart below. This pattern provides strong support at the level of 4,800, which corresponds to 16000 on the Sensex.
A gradual move back to the upper trendline could be in the offing. Secondly, on the bearish front, pessimists would argue the development of a “double top” pattern with the neckline at the level of 16600. The same provides us a target of around 15,300. However, we would give little importance to this pattern as the volume characteristics and other indicators do not support the same.
Index Outlook: In the short-term, a volatile trading range has been established between 16,000-16,600 a breakout from which is likely in the coming week. We believe that the breakout is likely to be on the upside that would help resume the broader uptrend and take the index gradually back to 17,200-plus levels.
For the medium-term, the bulls would continue to have the upper hand till the Sensex stays above the crucial support of 16,000, which is now a make-or-break point. We believe the recent decline is a buying opportunity and therefore maintain our medium-term target of 18,000/5,300.
BSE IT: The Technology index has been an outperformer in the last few weeks and we expect the same to continue going forward. The index looks on course to test a level of 4800 from where a minor pullback is not ruled out. A bigger target for the index would be 5100 that should be achieved over the next couple of months.
BSE Healthcare: The sector has one of the rare charts that has got close to its Jan 08 high. A consolidation pattern breakout has been spotted last week that calls for another 7-10% upside in the near term.
BSE Metals: The index has been locked within the consolidation range of 16300-17200 for the last one month. An upward breakout from the same is likely this week that should help it reach 18500 and potentially even 19300
Gautam Shah
(The author is VP & technical analyst, JM Financial)
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