There's scope for further rise

MACRO TECHNICALS

Breadth signals improved. After almost two months, advances outnumbered declines.

The market started a recovery on Monday and prices continued to rise through most of the week. The Sensex closed at 6388.48 points for a week-on-week gain of 3.80 per cent and the Nifty closed at 1977.5 points for a gain of 3.94 per cent. The Defty was up 4.64 per cent as the rupee surged against the dollar.

Breadth signals improved along with the indices and after almost two months, advances outnumbered declines for five sessions in succession. The BSE 500 was up 3.45 per cent. Volumes, however, were on the lower side until Thursday when trading picked up.

Outlook: The market has made a pattern of higher peaks for the first time since March 10, creating the impression that the intermediate downtrend has reversed. The indices are running into resistance at current levels but there's scope for a rise until Nifty 2000/Sensex 6450 levels at least. Next week could see range-trading between Nifty 1950 and 2000 in a consolidation. The Nifty will cross 2000 only if there's a big volume expansion.

Rationale: The pattern of higher tops coupled to multiple bottoms at around Nifty 1900 (Sensex 6140) suggests the intermediate downtrend is over. Momentum indicators such as the RSI and RoC remain in buy mode and the charts indicate a target of around 2040/6625.

This was week eight and most intermediate trends do peter out between six-12 weeks. The long-term trend may also still be positive because the market found support and turned up near the 200 DMA.

Counter-view: A technical recovery was overdue this week and it may have flattered to deceive. The rally didn't generate the sort of volumes that would make one confident about a continuing uptrend despite the good chart-patterns. If the market drops below 1900 on the next downtrend, we'll know the bears haven't gone into hiding.

Bulls and bears: Most stocks did well this week. The standout performers were in two sectors. Bank stocks shot up on a combination of results and RBI policy announcements. Among bank shares, Bank of India, Bank of Baroda and Corporation Bank really outperformed.

The other hot sector was PSU refineries where stocks such as BPCL, HPCL, Kochi Refineries and IOC saw big rises. Apart from this there were scattered performers such as Bajaj Auto, Bharti Tele, Cipla, CMC, East India Hotels, Flextronics, Gail, Infosys, Maruti, Nicholas Piramal, Tata Tea, Thomas Cook and Zee.

MICRO TECHNICALS

BPCL
Current price: 378
Target price: 405

The stock has shot up with a large volume expansion. It has completed a bullish pattern and has a target of about 405. Go long and keep a stop at 360. There is some resistance at 385 so, it may take a while to overcome the barrier there and complete this move.

CORPORATION BANK
Current price: 354
Target price: 385

The stock has shot up with a strong volume action. It has resistance at current levels. If the price closes above 360, it will have a target of about 385. Go long and keep a stop at 340. There is a fairly large daily range.

EAST INDIA HOTELS
Current price: 335
Target price: 355, 400

The stock has started to pull out of a trading range between 315-335 where it has been stuck for about three weeks. It has developed a bullish pattern along with a volume expansion. EIH has a near-term target of around 355 and a long-term target of about 400. Accumulate with a stop at 320.

NICHOLAS PIRAMAL
Current price: 239
Target price: 255

The stock has risen on good volumes. It has completed a bullish pattern and should have a target of about 255. Keep a stop at 225 and go long. The trend has been bearish since mid-January when the price started falling from 340 levels. There are early indications of a trend reversal - these will be confirmed only if the stock closes above 245.

ZEE TELEFILMS
Current price: 150
Target price: 170

The stock has risen through the week on strong volumes, moving from 130 level on last Monday. It has completed a bullish formation and the target is around 170. Keep a stop at 145 and go long.

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

Rounding bottom

CLASSROOM

Rounding bottom is a long-term reversal pattern, sometimes referred to as 'saucer bottom', and represents a long consolidation period that turns from a bearish bias to a bullish bias.

In order to be a reversal pattern, there must be a prior trend to reverse. The low of a rounding bottom usually marks a new low or reaction low. However, it is possible that there are occasions when the low is recorded many months earlier and the security trades flat before forming the pattern.

When the rounding bottom does finally form, its low may not be the lowest low of the last few months. The first portion of the rounding bottom is the decline that leads to the low of the pattern.

This decline can take on different forms: some are quite volatile with a number of reactionary highs and lows while others trade lower in a more linear fashion. The low of the rounding bottom can resemble a 'V' bottom, but should not be too sharp and should take a few weeks to form.

Because prices are in a long-term decline, the possibility of a selling climax exists that could create a lower spike. The advance off the lows forms the right half of the pattern and should take about the same amount of time as the prior decline.

If the advance is too sharp, the validity of a rounding bottom may be in question. Bullish confirmation comes when the pattern breaks above the reactionary high that marked the beginning of the decline at the start of the pattern. As with most resistance breakouts, this level can become support.

However, rounding bottoms represent long-term reversal and this new support level may not be that significant.

In an ideal pattern, volume levels will track the shape of the rounding bottom: high at the beginning of the decline and low at the end of the decline and rising during the advance. Volume levels are not too important on the decline, but there should be an increase in volume on the advance, preferably on the breakout.