Mixed trend likely

MACRO TECHNICALS

The markets may see alternating sessions of buying and profit-taking through the week.

The market continued to inch upwards to new highs despite bouts of profit-taking. The Nifty closed at 2211.9 points for a week-on-week gain of 0.80 percent. The Sensex closed at 7210.77 for a gain of 0.87 per cent. The Defty gained 0.87 per cent.

Breadth signals were reasonable. Advances outnumbered declines by a healthy margin and volumes were high, especially on Monday and Thursday. The BSE 500 rose 0.52 per cent. However, momentum indicators hit oversold levels and, the Nifty put-call ratio dropped.

Outlook: We'll see alternating sessions of buying and profit-taking through the week, with trading probably starting weak on Monday and some net gains by the weekend. There is support between Sensex 6975 and 7075 and Nifty 2075 and 2150 and reactions should end there.

Rationale: The intermediate trend has been up for eight weeks - it could describe higher tops and bottoms for another three-four weeks since the long-term trend is also up.

However, profit-taking is apparent and the poor momentum signals should mean that trend continues. Usually a zone of prior resistance turns into support once it is broken and we expect that pattern to be maintained.

Counter-view: High oil prices could exert pressure on the sentiment once the euphoria of the Reliance settlement subsides.

Intermediate trends have also been known to break after eight weeks though this is unusual when the intermediate and long-term trends are in phase. The key danger signal would be a drop below Sensex 6900/Nifty 2100 setting up a pattern of lower bottoms.

Bulls and bears: Pharma stocks moved up strongly as a group - there was especially bullish activity in Cipla, Dr Reddys, Novartis and Pfizer.

Among other stocks, there was a less discernible industry focus. Other gainers who looked capable of sustaining the rise through next week included Apollo Hospitals.

Ashok Leyland, Bajaj Auto, Bank of India, Cadila Health, Century Textiles, Colgate, Glaxo, ITC, L&T, LIC Hsg, Polaris Software, VSNL and TCS.

MICRO TECHNICALS

CIPLA
Current price :319
Target price: 380

The stock has gained in price along with a strong volume expansion. It is close to completing a bullish formation on the weekly charts - a couple of closes above 315 should do the trick. The target would be between 380-400 depending on formation interpretation and this should be achieved inside 3 weeks. Keep a stop at 310 and go long.

ITC
Current price: 1670
Target price: 1725

The tobacco major continues to maintain its pattern of steady gains with the weekly priceline rising along a 40 degree slope since June 2004. Keep a stop at 1600 and go long. The next target should be about 1725.

LARSEN & TOUBRO
Current price: 1183
Target price: 1225, 1350

The stock has attracted sudden interest perhaps because of the substantial Ambani stake. It has also seen volume expansion along with an upside breakout from a trading range. In the short-term, the target is likely to be around 1225. However there is a likely longer-term target of about 1350 and this should be achieved in six-12 weeks. Keep a stop at 1155 and go long.

POLARIS SOFTWARE
Current price: 123
Target price: 150

The stock spurted up on high volumes in the past two sessions. At 122, it breached an important resistance. It should have a short-term target of 130 and a likely long-term target of 150-odd. Keep a stop at 120 and go long, booking partial profits at 130.

TCS
Current price: 1352
Target price: 1400

By closing above 1335, the stock has completed a bullish formation albeit without volume expansion. It ought to have a target of about 1400. There will be support at around 1330-1335. Keep a stop at 1330 and go long.

(The target price and projected movements given above are in terms of the next five trading sessions unless otherwise stated.)

Island reversal
CLASSROOM

Island reversal consists of two gaps - one upside and the second downside - that are made in very rapid succession. As a result, a little 'island' is left with no trading around it.

This pattern is unusual because the market is, in essence, totally reversing its viewpoint on the stock. The first gap is highly bearish; the second highly bullish.

While the island reversal sounds like a very important event, in actuality the second gap usually just produces a reversal of the previous movement.

In other words, the stock, in a 'bullish island reversal', is likely to retrace to around where it was when the downturn started.

It is an occurrence where a stock price will gap up/down, trade higher than this price, and then gap down/up below the initial price.

An island reversal occurs when a stock indicates an uptrend, trades above the gap which occurs, then gaps back down and trades below the initial price.

It is not a common phenomenon and might not necessarily mean the formation of a major top or bottom but under normal circumstances it does result in prices moving back for a complete retracement of the previous move. This cannot be taken as a thumb rule and there have been instances of islands forming at major reversal points.

An island reversal might also consist of a one-day reversal or of a rather small trading range separated from the move which led to it and is usually symbolised by high volume. The build up might have taken days, weeks or even a one-day reversal as the case maybe.

An island reversal pattern is very difficult to trade on unless it is a rather near-term trade as a good part of the retracement might already have been exhausted by the time the pattern has been identified and the future course of the action charted.