Intermediate trend still vague

MACRO TECHNICALS

If the market stays above Nifty 1970, prices are likely to start consolidating and move up.

The market stayed rangebound through much of the week and dipped on Friday. The Sensex closed at 6479.54 points for a loss of 1.9 per cent. The Nifty was down 1.76 per cent at 2031.2 points. The Defty was off 1.74 per cent as the rupee stayed strong.

Breadth signals were on the weak side. Declines far outnumbered advances and volumes declined through the week. However, the BSE 500 lost only 1.25 per cent and outperformed the major indices.

Outlook: The market is back at a critical support level of Nifty 2025/Sensex 6450. This week, it is likely to hold above Nifty 2000 or bounce back into the 2050-2075 range where it traded through most of last week. If 2000 is broken however, the market will test support at 1970 again.

Rationale: The long-term trend still seems bullish but the intermediate trend is not clear. The last intermediate bottom was at Nifty 1970 on March 30. If the market stays above 1970 or holds there, we will have an optimistic view on the intermediate trend. Prices should then start consolidating and moving up. If 1970 is broken, the next reliable support would be at about 1900. Next week should bring on some clarity on this.

Counter view: The lack of volumes is the worrying factor. In the absence of demand, prices can collapse dramatically and suddenly. A dip below 1900 would suggest that the bulls are in serious trouble.

Bulls and bears: Normally one sticks to volume 'Group A' stocks in this column because that is where trading interest is concentrated. However, this week, there are a lot of relatively smaller stocks featured. This is because very few big stocks made movements worth commenting upon and there were only two sectors as such, where buying interest seemed to be concentrated.

A few second and third-ranked IT stocks such as Aztec Software, Polaris and Visualsoft did well. A couple of textile companies such as Mahavir Spinning and Vardhman looked bullish.

Among major stocks, Adani Exports, Bongaigaon Refineries, Colgate, Finolex, Hind Oil Exploration, ITC, Nirma, Thermax looked good. There is a huge surge in trading volumes noticeable in Reliance Industrial Infrastructure, Vesuvius Industries and Wockhardt Life.

MICRO TECHNICALS

HIND OIL EXPLORATION
Current price: 146.95
Target price: 160

In the last five sessions, the HOEC share price has moved from 105 to current levels on increased volumes. It's spent the last couple of sessions consolidating with a daily range of 135-147 while volumes have expanded. Try and buy at the lower end of this daily band. The target should be 160.

ITC
Current price: 1,400
Target price: 1,500.

The stock has completed a bullish formation upon the details of the deal with the government being released. It could now have a target of about 1500 in the short run and it might move till around 1700 in the timeframe of about 6 months. Go long and keep a stop at 1360.

POLARIS SOFTWARE
Current price: 118
Target price: 137

The stock has seen an expansion in volumes allied to a rise in prices. If it breaks resistance around the 120 mark, it has a target of around 135. There is another strong resistance at 137 so, this 135 target is unlikely to be exceeded.

THERMAX
Current price: 637
Target price: 710

The stock has moved up without generating exceptional volumes or a steep curve. If it closes above 640, crossing a resistance between 635-640, it would then have a target of about 710. go long and keep a stop at 610. The stock has a fairly wide daily range; so beware of being stopped out.

WOCKHARDT LIFE
Current price: 30.7
Target price: 34,36

When the stock closed above 29, it completed a bullish formation on high volumes. It has a potential target between 34-36. Go long and keep a stop at 25. The stock has just seen a positive change in its long-term trend and crossed above its own 200 DMA.

Head and shoulders top

CLASSROOM

A head and shoulders top is a reversal pattern which is normally witnessed after a prolonged advance and would signify a major reversal in the trend. The longer the time taken in its formation, the greater the reversal area and more potent would be the implication on the price.

This is a relatively common pattern and reasonably consistent is terms of reliability, is commonly spoken about and would have a significant bearing on the future price action especially after a significant run up. A typical head and shoulders top would generally consist of the following characteristics:

A reasonably strong rally tops out a long and significant upmove on which volume becomes quite heavy. This is followed by a small decline during which volume declines. This is known as a left shoulder. Another high volume rally, which goes on to form a new high (breaches the top of the left shoulder) and is followed by another decline but again on low volume, taking prices to somewhere near the earlier bottom, is known as a typical head.

A third rally, which is taking place clearly on lesser volume as compared to either the left shoulder or the head while prices also fail to reach the height of the head before a decline, sets in. This would constitute a right shoulder.

Finally, prices depreciate below the 'neckline' (under normal circumstances, this is a horizontal demand/support line but could be an upward or downward slanting line as the case maybe) which is drawn by connecting the two bottoms (these are formed when prices decline after forming the left shoulder and forming the head).

While a mere breach of this neckline is not enough, it would actually need to close below this line by roughly 3 per cent of the scrip's market price while even the three-day away rule can be used judiciously. Such an event would eventually confirm the validity of the pattern, making it worth acting upon.

All the above-mentioned points are identifications of a valid head and shoulders top formation while the non-confirmation of any of the above points could question the validity of the pattern. Following is the price chart of Satyam where there is a clear indication of a head and shoulder pattern.