Both 4,500 and 4,550 levels are significant resistances and it would take extraordinary turnaround in sentiment to push prices up further.

A massive sell off on Friday pulled the market back from record highs. The Nifty closed at 4,445.2 losing 2.46 per cent on a week-to-week basis. The Sensex was down 2.12 per cent at 15,234.57 points.

For the record, the Nifty and Sensex achieved all time highs on Tuesday at 4,647 and 15,868 respectively.

Volumes were massive on Friday – even higher than during Thursday’s F&O settlement, which in itself set records. The advance to decline ratio was exceedingly negative. There would be cold comfort for dollar-investors because the rupee lost ground and the Defty was down 2.86 per cent.

On Friday, anecdotal evidence suggests that domestic as well as foreign institutions were big net sellers.

Outlook: Chart patterns suggest that the correction is likely to continue in the timeframe of the next 3-4 weeks. The Nifty has an intermediate support at 4,300 which is likely to be tested.

However, there should be a pullback early next week when shorts are covered. The upside on a recovery is likely to be no more than about 4,550 at the maximum.

Rationale: Friday’s breakout looks like a classic. Volumes expanded as successive supports were broken and this means a strong intermediate downtrend. The next reliable support is around Nifty 4,300 and that is likely to be tested.

However, a pullback to 4,500 on short-covering is quite likely and even a pullback to 4,550 is possible. Both those levels are significant resistances and it would take an extraordinary turnaround in sentiment to generate enough volume to push price up further.

Counter-view: Friday’s trading saw extraordinary volumes – more even than in the May 2006 crash. While high volumes is usually a bad signal on sell offs, very, very high volumes can mean a selling climax – all bearishness is flushed out and no sellers are left. If that’s the case, this will be followed by small price gains on very low volumes in the subsequent 5-10 sessions.

However, resistance at 4,550 is very strong and unlikely to be broken. Hence, an intermediate downtrend is near-certainty. It remains to be seen how long that will last and how deep the correction could go.

Bulls & bears: There are no bullish pivotals except for ITC. We can however, seek stocks that will recover quickly on a pullback. And of course, we can seek stocks that look extra-weak and likely to lose more ground than the market.

Ranbaxy and Maruti moved up due to massive short-covering during the past two sessions. Bhel has hit support and Suzlon saw some investment buying. Tata Power held on solid results. The entire banking sector may see a relief rally if RBI opts for a rate cut (unlikely) on July 31.

MICRO TECHNICALS

ITC
Current Price: 172.4
Target Price: 185

The stock appears to have made a bullish breakout on high volumes. It has strong support at 170. The upside target would be between 185-190. Keep a stop at 169 and go long. Book partial profits at 180.

Maruti
Current Price: 830
Target Price: 805

Short-covering has led to a pickup in price but the scrip has been unable to penetrate resistance at 835. Keep a stop at 835 and go short. Cover at 810. The intermediate trend is likely to be range trading through a zone of 805-835.

Sail
Current Price: 148
Target Price: 137

The stock has made a downside breakout on reasonable volumes. It has support at current levels but that is likely to be broken. The next reliable support is at 135-137. Keep a stop at 151 and go short. Cover at 138.

Ranbaxy
Current Price: 374.7
Target Price: 355-385

Massive short-covering has led to a recovery from lows of 339-340. Ranbaxy has huge resistance at 380 but it could penetrate this on an intra-day basis.

Next week, expect trading to range through 355-385 with closes near the lower end of the range. The pattern will re-align to that of the overall market.

Reliance Industries
Current Price: 1,867.5
Target Price: 1,810

The stock has made a downside breakout on big volumes. It has reliable support between 1,795-1,820 and is likely to settle in the middle of that zone. Keep a stop at 1,875 and go short. Cover at 1,820.