Week Ahead: A likely target of 3625 on the upside

MACRO TECHNICALS

The oversold options market could well tip the balance in favour of a further upmove.

The market finally made a clear breakout past resistance in the Nifty 3475-3500 zone. Despite a small correction on Friday, the market made substantial gains.

The Sensex closed at 12236.78 points for a week-on-week gain of 1.89 per cent. The Nifty made a gain of 1.88 per cent, closing at 3544.05 points. The Defty rose 2.2 per cent as the rupee continued to revel in a scenario of easing crude prices.

Breadth signals were good with more shares advancing than declining. The BSE 500 rose only by 1.25 per cent however, and that suggests big stocks did much better than their smaller brethren. Volumes dipped on Friday after reaching respectable levels earlier in the week.

Outlook
The breakout sets up a likely target of 3625 Nifty on the upside and there's support now between 3475-3500. Volumes dipped on Friday and the A/D went negative. So the move may not immediately fructify.

However the Nifty put-call ratio is at 1.55 going into settlement week. So the oversold options market could well tip the balance in favour of a further upmove. Momentum indicators are positive and so an upmove is also likely on those grounds.

Rationale
Normally the Nifty PCR is a fairly reliable short-term indicator and it's definitely in an oversold zone.

In settlement week, it's likely to have a direct impact. That apart, the breakout itself created a target of 3625 and there was some volume expansion coincident with the breakout, although volumes dipped afterwards.

Counter-view
Volumes are always a key signal and lower volumes usually mean less demand. The underperformance of the BSE 500 further indicates that the bullishness doesn't have much breadth in its favour.

The intermediate trend has been bullish since mid-June and must be close to topping out. Even if the market gains till settlement, it would be prudent to expect a fairly large correction within 10 sessions.

Bulls & bears
The "hot" bank sector underperformed the market this week and the IT sector was also sub-par in returns compared to the Nifty, though both the Banknifty and the CNX IT logged positive returns.

Action was scattered across the old economy with cement stocks such as ACC, Grasim and Gujarat Ambuja doing quite well. Apart from cement, ABB looked poised to make an upmove and Bharti continued an upmove which began last week.

There was scattered buying across stocks such as Bajaj Auto, Gail, Oriental Bank, Tata Chemical and TCS. Oddly, given the dip in crude prices, there was no knee-jerk firming up in PSU refining stocks and in fact BPCL took a hammering.

Jet airways saw some profit booking and seems to have settled down into range-trading. IPCL did well despite the selling pressure on PSU refiners.

MICRO TECHNICALS

ABB
Current Price: 2909
Target Price: 3030

The stock has seen an engulfing pattern