Resistance likely

MACRO TECHNICALS

The market continued its precipitous decline until Friday. On the week's last session, there was a rebound.

The Sensex dipped to a low of 5596 before it rebounded to close at 5816.64 for a week-on-week loss of 2.18 per cent. The Nifty turned around from a low of 1771 to close at 1847.55 for a w-o-w loss of 2.79 per cent. The Defty lost 2.73 per cent.

The broad BSE 500 lost 3.7 per cent on the week, which signaled weakness in the overall market versus the big stocks. However, other breadth signals improved.

On Friday, advancing stocks far outnumbered declines. Volumes remained high through the week. The Nifty put-call ratio moved up to 0.41, which is marginally on the oversold side.

Outlook: Next week should see a relief rally with net gains amidst continuing volatility. The dimensions of that will define the market trend. If the rally continues to new highs above Sensex 6249/Nifty 2015, the bull market is alive and well.

If the rally terminates below those all-time highs, we may have to cope with a new long-term bear market. At the minimum, expect resistance around Sensex 5950/Nifty 1900 where there will be a lot of selling pressure.

Rationale: The downmove we've just witnessed could have been a correction inside a continuing long-term bull market. Or, it could have been the first stage of a new long-term bear market.

The market did bounce from reasonable support levels hitting first Fibonacci support almost exactly hitting calculating from the bottoms in April 2003.

It's easy to read signs of a short-term rally. Momentum indicators have started giving buy signals from oversold zones.

It is the strength of that rally which is critical; by definition, a continuing bull market must see rising tops and we don't know if there is enough power in this rally to create such a pattern.

Counter-view: It is, of course, possible that the market will continue to react through next week. The derivatives settlement position is certain to have an effect on it since a lot of players have been caught unprepared.

If the market does break below Friday's lows, it would be a very negative signal for its continuing health.

Bulls and bears: A lot of big stocks turned around on Friday. There is a narrowing effect evident - most volumes are concentrated on big stocks and we'd advise traders to stick to large, liquid counters. Among these, it seems that the rebound could be pretty broad.

One sector that seems likely to outperform in the rally are PSU Banks such as Bank Of Baroda, Bank of India, SBI, etc.

Another sector that should outperform is ICE - stocks such as CMC, Digital (watch the reverse book-building effect here), Hinduja TMT, Infosys, Polaris, Rolta, Satyam, TV-18 and Zee are poised to jump sharply.

Energy/refinery stocks like Chennai Petro, Gail, HPCL, IOC, IPCL, ONGC and Kochi Refineries all look good. In a more scattered fashion, stocks such as Asian Paints, Bhel, BSES, Grasim, Hind Zinc, Jaiprakash, Pfizer, Tisco and Trent could all deliver short-term returns.

MICRO TECHNICALS

ONGC
Current price: 783
Target price: 825

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The stock price of Oil and Natural Gas Corporation (ONGC) seems to have been similarly affected by IPO considerations.

The recovery is coming on lower volumes and a less powerfully bullish formation. There is some resistance at 805 but the recovery is likely to continue until the 825 mark. Set a stop at 770 and go long.

ASIAN PAINTS
Current price: 346
Target price: 365

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The stock hit a new high last week. The pattern now has a target of around 365 but this could take two-three weeks to fulfill. It looks a good defensive stock to be holding in an uncertain, volatile environment.

HINDUSTAN ZINC
Current price: 112
Target price: 120

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The stock has seen a recovery with a bullish short-term pattern. It is running into fairly strong resistance.

There is likelihood that the upmove will be halted at around the 120 level. If you go long, be prepared to book profits at 120 levels. Keep a stop at 95.

GAIL
Current price: 216.55
Target price: 240

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The price is IPO-sensitive and we may have had the classic effect of investors selling to drive the IPO price down when they can buyback.

The stock dropped from a high of 312 to a Thursday low of 189 before recovering on Friday with a bullish island pattern.

It should move up till around 240 before it runs into serious selling pressure. Further upmoves are also possible. Set a stop at 205 and go long.

MAHINDRA & MAHINDRA
Current price: 408.7
Target price: 424

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The stock made a recovery from support around the 365 level. Both the pattern of correction (a decline of 23 per cent in terms of the upmove since April 2003) as well as the subsequent recovery (a recovery of 61.8 per cent of the losses since January 15, 2004) are in coincidence with Fibonacci theory.

The stock should lift back till at least the 424 level and is quite likely to test its highs around 445. Keep a stop at 400.

SBI
Current price: 624.5
Target price: 650

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There has been a recovery from the low of 578 on Thursday. There is resistance at 632, which will cause some obstacle but should be broken.

There is a very powerful resistance at 650 where we could normally expect the rally to terminate. Go long, be prepared to book partial profits at 632 and to exit completely at 650. Keep a stop at 596.

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