Markets to correct after new highs

MACRO TECHNICALS

There is a good chance that the rally will be followed by a strong intermediate correction.

A truncated week ended strongly with a rally on Friday after a smooth settlement on Thursday. The Nifty closed at 3739.35 points for a gain of 1.7 per cent while the Sensex was up 1.55 per cent at 12906.

The Defty gained 2 per cent as the rupee continued to strengthen. FIIs remained strong net buyers, while mutual funds were marginally negative for October.

Breadth signals were reasonable. Advances outnumbered declines and the BSE500 outperformed the narrower Nifty and Sensex. Bank shares did particularly well with the Bank Nifty shooting up 3.9 per cent.

Outlook: There's a fair chance that the market will establish a new set of record highs in the coming week""it's possible to project a Nifty target of 3830 from the current chart positions. There's an extremely good possibility that any such rally will be followed by a strong intermediate correction.

Rationale: The market has been testing resistances close to its May highs without quite managing a breakout. Momentum indicators such as the RoC and RSI remain weak. The intermediate trend has been positive for over four months. It's high time there was a correction.

Counter-view: If the market does break out to clear new highs, it will probably lead to another burst of momentum investing. That could prolong the rally.

Bulls & bears: The driving force behind the rally was the banking sector where SBI and BoB made strong breakouts while stocks such as Oriental Bank, Bank of India, Punjab National Bank, Canara Bank and Indian Overseas Bank recovered smartly from lower levels.

Oil stocks also did well. ONGC gained volumes after the split, while Reliance gained despite the refinery fire and Chennai Petro recovered from lows on massive volumes.

Apart from these two sectors, investment was scattered across the board. ABB, Bharti Airtel, Grasim, M&M, GE Shipping and Siemens would be stocks for bulls to track.

There was large-scale selling in Hero Honda, Hindustan Lever and Suzlon. Bajaj Auto has taken a hammering but the stock may finally be bottoming.

MICRO TECHNICALS

ABB
Current Price: 3716.75
Target price: 4000

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It's impossible to project a target with a reasonable degree of comfort given that the price line has soared vertically and the stock's already at an all-time high.

On long-term charts, it's possible to project a possible target around 4000. Keep a stop at 3650 and go long. Move the stop up by 50 for every 50-point advance.

GE Shipping
Current Price: 312.6
Target price: 325

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The stock appears to have made a breakout on high volumes by closing above a strong resistance at 310. The next short-term target would be 325. Keep a stop at 309 and go long. The long-term pattern looks very promising so it's possible to consider taking delivery for about five-seven weeks.

Hindustan Lever
Current Price: 226
Target price: 210

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HLL has witnessed massive selling in the past few sessions, while the price-line has plummeted. Somewhere between 210-220, HLL will find support. Two possibilities exist for the trader.

Go short with a stop at 231 and cover below 215. The second possibility is to accumulate a delivery position if the stock drops to 210 with a 12-14 week perspective

Mahindra & Mahindra
Current Price: 762.5
Target price: 825

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Two sessions of strong buying has led to a vertical take-off in its share price and this all-time high is backed by a big volume expansion. The move is strong enough to continue until about 825, which is where one would project a target. Keep a stop at 730 and go long.

SBI
Current Price: 1094
Target price: 1225

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The doyen of the banking sector saw a clear breakout on Friday. It's an easy chart to project targets. There's support at 1030 and 1060 "" use 1060 as a stop loss level. There is an upside till around 1225. Go long.

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