Market may continue to rise

MACRO TECHNICALS

The current breakout formation suggests a long-term target of 7500 for the Sensex and 2350 for the Nifty.

It was a big week. Powered by the Reliance settlement, the market soared to new highs. The Sensex closed at 7148.62 points with an intra-day high of 7178 on Friday, for a week-on-week gain of 3.50 per cent.

The Nifty gained 3.34 per cent closing at 2194.35 points on Friday with an all time intra-day high of 2204. The Defty was up 3.47 per cent as the rupee strengthened.

Breadth signals improved in the wake of the settlement. Advances outnumbered declines by a good margin and volumes were on the high side. The BSE 500 was up 2.45 per cent however, showing that there was relatively more interest in pivotal stocks.

Outlook: Given a breakout to new highs, backed by strong volumes and good breadth, the market should continue to move upwards. The current breakout formation suggests a long-term target of 7500 in the Sensex and 2350 in the Nifty.

In practice however, we've noted that the market rarely achieves chart target when it hits a new high. The market is slightly overbought at the moment but there is support at Nifty 2170 and Sensex 6950.

Rationale: By definition, a breakout to a new high accompanied by volume expansion is bullish. However, there is invariably profit-taking in such situations.

The market is into week seven of an intermediate uptrend; it could carry on for upto four-five more weeks or it could see a reaction. Any reaction should terminate at support close to the point of breakout - that is, near the previous highs of March 2005.

Counter-view: In strictly technical terms, if we ignore the previous behaviour of the Indian indices, this breakout looks quite strong and capable of achieving the price-targets of 2350/7500 mentioned above.

Bulls and bears: The big driver was of course the Reliance settlement and group scrips such as RIL, REL, Reliance Capital and IPCL moved very strongly. Since all these are available in the derivatives segment, an analysis is given in that section.

Apart from Reliance group, IT shares moved up until Thursday but there was a sell off on Friday and there may be weakness here early in the week. There was also bullish action in two-wheeler stocks with Bajaj Auto, Hero Honda, LML and TVS all doing well.

There was bullish interest in individual stocks such as Amara Raja Battery, Apollo Hospitals, Bharat Forge, Hind Lever, Hindalco, ITC, M&M, Ranbaxy, Saregama, Tata Tea, TV18 and NDTV.

MICRO TECHNICALS

AMARA RAJA BATTERY
Current price: 163
Target price: 150

The stock has shot up with a massive volume expansion on the basis of good news about some OEM orders from Hyundai. It has already exceeded any price targets that the charts might predict. The stock is now worth buying only on a decline since some profit-taking is inevitable. Wait for a drop to support at 150 levels.

BHARAT FORGE
Current price: 1465
Target price: 1500

The stock regained momentum on Friday, rising sharply on a volume expansion. It's completed a small bullish saucer formation and it should have a target of 1500. There will be resistance at levels around 1480-1510, where there was lots of trading in March. Keep a stop at 1455 and go long.

HERO HONDA
Current price: 602
Target price: NA

The stock rose to a new high on very strong volume action. It also completed a bullish formation by closing above 595. The target would be around 635 and there ought to be support at 595 on any profit-taking.m Keep a stop at 595 and go long.

SAREGAMA
Current price: 153
Target price: NA

The stock has moved up on steadily increasing volumes. At 151, it completed a bullish formation. The upside target should be a minimum 165. Keep a stop at 149 and go long. Be wary of rising intra-day volatility.

TV18
Current price: 297
Target price: 335

The stock has moved upwards on strong but stable volumes - that is, there has been little volume expansion. It has completed a bullish formation which ought to generate a target of approximately 335. Keep a stop at 290 and go long.

Watch that gap
CLASSROOM

A gap is symbolic of a price range at which no shares are traded. A gap signifies a support in a bullish market and resistance in a bearish market. A gap on the daily chart appears when the lowest price of the stock traded on any one day is higher than the highest price at which it was traded on the previous day.

When the price movements of such two days are plotted they will not overlap or even touch the same horizontal level on the chart while actually there will be a space or a price gap between them. An important thing to remember is that a gap needs to be closed and the trend cannot be relied upon until it is covered.

Actually there are many gaps, especially in illiquid stocks where thin trading results in gaps more often. In fact, ex-dividend gaps do not have any trend implications because this is a direct result of reduction of its book value and not because of a change in the demand/supply equation. Gaps can be classified under four categories:

1) Intra-pattern gap: This is a gap which stands to occur within a trading area or a congestion area (read as accumulation or consolidation) or pattern. An important point to note is that pattern gaps develop more in consolidation patterns than in reversal patterns.

2) Breakaway gap: This appears in consolidation and accumulation patterns but the difference is that its development at the completion of the formation of the move when the prices break away.

3) Runaway gap: Runaways are less common than gaps mentioned above and are far more technically important because they give a rough idea about the probable price target. This runaway or continuation gap occurs at the halfway mark which could make the analyst infer that the stock will go up as much after the gap as the distance between the beginning of the move and the gap while this needs to be measured vertically.

4) Exhaustion gap: The difficulty with this gap lies in the identification of it and a clear indication would manifest itself only a day after it has occurred. If volume shoots up to extraordinary levels on the day following the gap and the prices don't move with the pace associated with that particular day's movement then the gap is probably a exhaustion gap.