Friday's correction could continue

Support levels for Nifty are 5350 and 5250. Extent of correction depends on FII fund flow.

Three very bullish sessions were sandwiched in-between two corrections. The Nifty hit highs of 5549 before easing off to 5428 points for a week-on-week gain of 4.67 per cent.

The Defty was up 4.89 per cent as the rupee closed at 39.33 versus USD. The Sensex blinked only after it had hit a high of 18845 and closed up 3.63 per cent at 18419 points. The Junior was up 2.6 per cent at just above 10020.

While volumes were excellent, breadth was less bullish. The BSE 500 was up only 3.03 per cent and smaller stocks less fancied. The Advances to Declines ratio was marginally positive for the week and very negative on Friday. The reason was clear.

The FIIs have poured money into the top 200-odd stocks. Indian funds have been net sellers for 15 sessions. Operator interest is concentrated on big stocks and retail investors have stayed out or booked profits.

Outlook: The correction could continue. Key support levels are Nifty 5350 (Sensex 18250) and 5250 (Sensex 17950). The market looked distinctly nervous by Friday evening. The depth of correction will, to a great extent, depend on FII attitude.

Rationale: In the past 7 weeks since August 24, the Nifty has climbed from 4100 levels without significant correction. That intermediate trend could last another 4-5 weeks in theory but every momentum indicator is overbought and breadth was negative on Friday. Also, volumes rose while prices fell, indicating that supply increased as traders fought to book profits.

Counter-view: The rally has come on the back of FII purchases driven by rupee strength coupled to an US Fed rate cut. Through October, Indian funds have been net sellers. If the FIIs stay positive, they have deep enough pockets to force the markets up. If they change attitude, there could be a significant correction.

Bulls & Bears: Breadth was exceedingly negative through Friday’s trading. The worst affected were finance and banking stocks with bellwethers SBI and Infosys taking a hammering and the other stocks in the two sectors following in their wake.

Among financial stocks, only Bank of India held out while Rolta was among the few gainers in the IT sector. Another erstwhile favourite, telecom major RComm also faced heavy selling.

There were isolated winners everywhere but the advance:decline ratio was 1:4 or worse across most market segments. Gail and ONGC were among the best performers. Powergrid continued to register gains through its second week of listing. Hind Unilever, Hindalco, IPCL, Mahindra and Mahindra and Reliance Energy were among the few big stocks that showed strength.

MICRO TECHNICALS

INFOSYS Current Price: 1929 Target Price: 2000

Since it declared Q2 results, Infy has been sold down from a high of 2140 to a low of 1903 in three sessions. It has excellent support at current levels and may be due for a technical recovery till the 2000 level. Keep a stop at 1900 and go long.

MAHINDRA & MAHINDRA Current Price: 828 Target Price: 900

M&M appears to have managed a high volume, upwards breakout despite the poor overall market trend. The projected target with this formation would be about 900. Keep a stop at 815 and go long.

ONGC Current Price: 1094 Target Price: 1150

The stock seems to have performed a classic uptrending breakout on high volumes. Depending on your chart interpretation, it has a target of between 1150 and 1225. Keep a stop at 1070 and go long. Book partial profits above 1130.

R COMM Current Price: 718 Target Price: 700

The stock saw a burst of selling on Friday after testing highs of around 750. It has good support between 700-710 but it is likely to test those supports again before it makes another upmove. Keep a stop at 730 and go short. If the stock closes below 700, repeat the short position with a stop at 710.

SBI Current Price: 1862 Target Price: 1800

The stock has seen selling that pushed it back to support at 1850 before a small recovery. If that support is broken, the next reliable support is at about 1800. There is clear resistance at 1880. Keep a stop at 1880 and go short. Increase the short position if the stock drops below 1850.