Nifty could correct after 3850

MACRO TECHNICALS

Momentum and volume signals are weak suggesting a substantial correction ahead.

The market continued to generate gains, moving to new highs. The Nifty closed at 3805 with a gain of 1.77 per cent. The Sensex closed up 1.74 per cent at 13,130 points. The Defty was up by 2.63 per cent as therupee gained after the RBI released its busy season policy and enhanced projections.

Breadth signals were poor. Volumes were reduced and declines far outnumbered advances. The BSE 500 rose by 2.63, which was an underperformance compared to the frontline indices.

The Nifty put-call ratio was held at over 1.75 so the derivative market is still oversold and emitting bullish signals. The FIIs and mutual funds were positive.

Outlook: The current chart patterns suggest a Nifty target in the range of 3850. That's likely to be achieved but it may be a significant top. The underlying weaknesses in the breadth and volume pattern suggest that the market could see a substantial correction.

Rationale: Momentum and volume signals are weak as indeed, they have been for a while. The market seems overextended both in terms of price as well as in terms of time. A reaction could lead to a pullback till the 3650 levels.

Counter-view: We may be running into a "two market" phenomenon. The bigger stocks in the F&O segment are definitely out running the smaller stocks. If the US markets of 1999-2000 are any guide, this sort ofschizophrenic behaviour can continue indefinitely.

In that case, we could see the big stocks continue to run up while smaller stocks languished at lower levels. The mid-caps for instance, have not moved back up to May 2006 levels although the Nifty and Sensex have exceeded the May levels.

Bulls & bears: The drivers this week were cement and IT stocks. Cement shares such as ACC, Grasim and Guj Ambuja all went up. Most IT stocks went down and that was reflected in the 2.16 per cent loss of the CNX IT.

Among other stocks, ONGC Reliance Industries, Reliance Energy, Tata Power and GE Shipping did well. Bajaj appears to have started a recovery. Dabur and Telco looked quite weak.

MICRO TECHNICALS

Reliance Energy
Current Price: 510.85
Target price: 540

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REL saw a massive burst of buying on Friday which lifted the counterby around 6-7 per cent. It has a likely target of about 540 and it could move till 610 if the volumes are sustained. It will run into resistance around 540-545 however. Keep a stop at 495 and go long.

ONGC
Current Price: 877
Target price: NA

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Ex-bonus target projections are necessarily inaccurate. However ONGC does seem to be in a bull run and we could expect a move till around the 950 levels under normal circumstances. There's a lot of volatility in the stock so the downside risk is considerable. Keep a stop at 840 and go long.

Gujarat Ambuja
Current Price: 123.75
Target price: 133

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The stock is poised on the edge of a solid breakout, if it closes above 125, it has a minimum target of 133 and it could move further. Keep a stop at 119 and go long. Extend the plus position if it closes above 125.

Tata Power
Current Price: 554
Target price: 570

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The price line suggests that Tata Power is picking up selective investment. However volumes have not risen as much as one would like. There should be a target in the range of 570-575. Keep a stop at 550 and go long.

Tata Motors
Current Price: 815
Target price: 780

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The stock has made a downside breakout with a volume expansion. This could be a powerful move with a possible target of 780. Keep a stop at 830 and go short. Book some partial profit below 800.

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