Resistance at the 4942-5050 band

MACRO TECHNICALS

Technical rally marked by low volumes, long-term trend still bearish.

The market rebounded sharply through settlement week on short-covering. The Nifty closed at 4942 points, a week-on-week rise of 8.05 per cent.

The Sensex was up 9.18 per cent at 16,371.29 points. The Defty was up 9.67 per cent as the rupee strengthened. The FIIs were net buyers through the first four sessions and sellers on Friday while domestic institutions were generally net sellers.

Background indicators were not that strong though advances outnumbered declines and prices of smaller stocks outran the megacaps. The BSE500 moved up 9.27 per cent and the Nifty Junior shot up 11.65 per cent.

However, while the price recovery was impressive, volumes were tepid, especially given that this was settlement week. Low volume is usually a signal that a price rise is unsustainable.

Outlook: The market may swing down towards support at Nifty 4650 and it is unlikely to be able to clear stiff resistance in a band between current prices and 5050. However, it seems as though the intermediate trend is no longer bearish though the long-term trend still is.

Rationale: A sharp price rise that is not backed by volume is a technical rally rather than a bull run. The market has been down since mid-January and it seems that the first powerful wave of a new bear market is over. The 200 DMA is trading around 5050 at this instant and prices are unlikely to move past that.

Counter-view: If we ignore the volumes, the price line would suggest that there is room for a rise till Nifty 5300. This can only happen if volumes improve dramatically. The positive signals would be a 25-30 per cent rise in daily volumes coupled to Nifty closes above the 5050 level.

Bulls & bears: Short covering obviously played a big part in the rally. Some of the sharpest turnarounds came in sectors where stocks have been hammered earlier. For example, banks, real estate (Unitech, Parasvnath and DLF were all up) and IT (Wipro led the way) were up.

Specific metal stocks also saw a spike with Tata Steel and Sterlite doing well after a massive sell off in the past couple of weeks. Pharma shares such as Dr Reddys, Divi's, Orchid and Matrix seem to retain their defensive attraction and FMCG majors ITC and HUL slowed on Friday after steady gains earlier.

Engineering and construction companies also saw a comeback with HCC, IVRCL, Lanco, Nagarjuna Construction and L&T all jumping. Other stock-specific upmoves included Adlabs, BHEL, Bombay Rayon, NTPC, Suzlon and Welspun Gujarat.

It is difficult to isolate the stocks that have responded purely on short covering from ones that could move a little further. The key will be sustained volumes. However, there ought not to be really severe bearishness for another week.

MICRO TECHNICALS

Adlabs
Current Price: Rs 682.7
Target Price: Rs 765

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The stock has come off lows in the Rs 485 zone within the past five sessions. It has also seen a massive volume expansion indicating that short-covering has been backed by investment buying. The target projection would be Rs 765 where there is massive resistance. Keep a stop at Rs 672 and go long.

Dr Reddy's
Current Price: Rs 592.6
Target Price: Rs 630

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A price breakout past resistance at Rs 583 has been accompanied by a big volume expansion in the past two sessions. There is a price target of Rs 630 and good support at Rs 583-585. Keep a stop at Rs 585 and go long. Book partial profits at Rs 620.

IVRCL
Current Price: Rs 408.5
Target Price: Rs 440

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The stock has climbed from Rs 335 level and it has the potential to move till Rs 440. The most interesting factor appears to be strong accumulation close to the bottom. Volumes were high at the price-lows, which is unusual and may signal a positive change in long-term trend. Keep a stop at Rs 395 and go long.

NTPC
Current Price: Rs 204
Target Price: Rs 225 (Long-term)

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The stock bottomed around Rs 185 and it is starting to move up though volumes are not encouraging. It may be a good delivery-holding with a 3-week perspective. Keep a stop at Rs 200 and accumulate. There is the potential for a move till Rs 225 and there is not much downside risk.

Welspun Gujarat
Current Price: Rs 391.60
Target Price: Rs 440

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The stock has made a v-shaped recovery from a bottom of Rs 285 in the last four sessions. It has also seen some volume expansion. There is relatively low float due to the increased institutional holdings. There is a possible target of Rs 440 and a minimum projection of Rs 410. Keep a stop at Rs 375 and go long. Be prepared for big daily swings.

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