Week Ahead: Correction on Muhurat day?

MACRO TECHNICALS

The rally has come on average volumes and been backed by poor breadth signals.

After soaring to new all-time highs, both the Sensex and the Nifty eased downwards after a couple of profit-booking sessions before the Muhurat.

The Nifty closed on Friday at 3676.8 points for a nominal week-on-week gain while the Sensex closed at 12723.59 points for an equally nominal loss. The Defty made a more appreciable gain of 0.4 per cent as the rupee continued to strengthen.

Breadth signals remained poor as they have been through this rally. The BSE 500 actually lost a little ground and advances were consistently outnumbered by declines.

The FIIs maintained a strongly net-positive attitude (with a little selling on Friday) while mutual funds were steady net sellers.

Outlook
The short-term outlook in the new Muhurat is somewhat negative. The correction that started on Wednesday may continue. There's support at Nifty 3625 and lower down, at Nifty 3450. On the upside, there's strong resistance at 3725 and beyond.

Rationale
The rally has come on average volumes and been backed by poor breadth signals. Momentum indicators such as the RSI, and RoC have moved down even as the major market indices advanced.

A price target of roughly Nifty 3750 has been achieved with the intra-day high of 3742 on Thursday. We won't get another breakout without some degree of volume expansion.

Counter-view
The initial Q2 results have been encouraging. If the trend continues, it may prove to be a driver for more volumes. A close above the 3740 level could be very encouraging.

The F&O settlement will probably mean that market-focus stays narrow but it may prove to be a driver for cash gains in a high-weight F&O segment due to optimistic rollovers.

Bulls & bears
Investment patterns are likely to remain fairly stock specific due to the Q2 results season. It appears that earnings projections were quite optimistic because several companies (TCS, Wipro, Grasim, HDFC Bank, Hindalco, Satyam) have delivered good results without being propelled into orbit.

Given the plethora of IT stocks above, the expectations from that sector were unrealistic after Infosys declared its results. There are several stocks that look strong.

For example, ABB, Dabur, Sail, Airtel and CMC are looking good. Banking seems to have gone off the boil