Heavy buying by foreign funds is fuelling the stock market rally though local investors are maintaining a wait-and-watch attitude in the belief that equities have become overvalued following strong gains in the past two weeks. Positive economic data is helping sentiment and fuelling the rally. India remained the top gainer for the third week in a row, with the key Bombay Stock Exchange (BSE) Sensex gaining 2.3% over the last week, followed by the US S&P 500 and Hong Kong’s Hang Seng indices. Despite rising for the fourth week in a row and the market consolidating with a downward bias in the middle of last week, renewed buying on Friday perked up sentiment. In the US, better-than-expected housing data and a pick-up in August business spending led to further stock market gains.

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Though short-term technical indicators such as the rate of change, relative strength index and oscillators are pointing to key indices being overbought, momentum analysis suggests that there is still steam left in the rally, with equities poised for further gains on Monday.

On its way up, the S&P CNX Nifty is likely to meet its first crucial resistance at 6,098 points, which may not be strong enough to terminate the rally. The Nifty faces its next critical resistance at 6,132, which could mark the start of some consolidation and profit-selling. However, if the momentum continues around this level and trading volumes remain high with the index rising, the chances of this level collapsing would increase. But I feel that beyond this point, there would be a lot of volatility and scepticism. The next resistance level for the Nifty would then come at 6,178.

On the downside, the Nifty would see its first support at 5,978, which would be a moderate support level. In case of a heavy technical correction, this level may not be able to hold and the Nifty may slip to 5,932, which is also a moderate support level. If the Nifty breaks this level on good volumes, it would call for a review of trading strategies as the broad outlook for the Nifty would turn bearish. The Nifty has immediate support at 5891, a crucial level that may decide the short-term direction of the index. A close below this level would mean more declines until the next support comes along at 5,648.

Global cues would be very important this week too with investors keeping a close watch on the US economic data. Key weekly data in the US includes two manufacturing reports—one from the Institute for Supply Management (ISM) and another from ISM-Chicago, better known as the Chicago purchasing managers’ index. A commerce department report on personal income and spending is also on the agenda. The ISM manufacturing report would be important because positive numbers could boost investor sentiment and confirm a pick-up in the world’s biggest economy. Among other critical US numbers, consumer confidence data would be released on Tuesday and the consumer sentiment index on Friday. The final figures on second quarter gross domestic product will be out on Thursday and September domestic car and truck sales will be reported on Friday.

Back home, this week Housing Development and Infrastructure Ltd (HDIL), Housing Development Finance Corp. Ltd (HDFC) and Welspun Corp. Ltd look good on the charts. HDIL, at its last close of 266.05, has a target of 276 and a stop-loss of 255. HDFC, at its last close of 732.90, has a target of 748 and a stop-loss of 714. Welspun, at its last close of 259.70, has a target of 268 and a stop-loss of 251.

Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at ticker@livemint.com