The Hindu Business Line : Indices overstretched; correction appears due

Preferred view: It was quite an eventful week at the stock market. The Nifty scaled a new peak by moving past the earlier high of 2183 recorded in March.

The index also moved past the psychological 2200 mark on Friday. It, however, closed a tad lower than this level at 2194.

The index could move to the 2230-2250 range in the near term.

It would, however, be safer to tighten stop-loss, as the recent rally appears overstretched. Considering the recent surge in price, a corrective phase may be just round the corner.

Besides, the emergence of a series of negative divergence between the price movement and that of the indicators is a sign of exhaustion. The negative or bearish divergence is more pronounced in weekly chart.

Despite the surge to a new high by the Nifty, the indicators, including the popular relative strength index (RSI), have not recorded new highs. They have posted lower highs instead. This is a classic case of bearish divergence that normally is a forewarning of an impending top and a subsequent correction.

Comments: The market action was in line with expectations. The Nifty ruled firm as expected and also moved to the target zone of 2185-2190 that had been mentioned over the past few weeks. The amicable settlement to the spat between the Ambani brothers provided the necessary impetus to the market.

The resumption of the inflow of funds from the FIIs also played a role in bolstering market sentiment. The decision to eventually raise prices of petroleum products also put to rest the earlier uncertainty about the time and magnitude of the impending hike.

A combination of these factors imparted positive sentiment.

SENSEX (7148.62)

Preferred view: The trend remained bullish as anticipated last week. The index has also moved past the target zone of the 7050-7100 range. The near-term trend remains bullish and the Sensex could move to the 7180-7200 range. The recent rally in the index has been devoid of any significant correction.

Besides, quite a few indicators suggest that the recent rally has pushed the index to overbought zone. A correction may be dawn upon the market anytime now. Investors holding long positions should turn the "caution" button on. Signs of weakness would warrant profit booking.

CNX IT (3023.25)

The index moved in line with expectations. A bullish trend prevailed in the early part of the week that helped the index move to the target zone of the 3050-3100 range.

The near-term outlook is bullish and the index could move to the 3100-3110 range. A close below 2980 would invalidate the positive view.

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