A recent Indian stocks rally is likely to extend gains to new highs for 2003 after the key index overcame key resistance levels last week, but a reversal could take place unless the pace slows down, chartists said on Monday.

A 3.9 per cent rise last week helped the benchmark Bombay Stock Exchange's Sensex overcome two important resistances and a further rally may help one of 2003's worst performing stock markets in the world to catch up with its peers, they said.

"This rise has helped it beat the falling tops trendline and a key retracement level resistance," said G Devanathan, strategist with brokerage Kantilal Chhaganlal, about the Sensex, India's most widely tracked stock exchange index.

He was referring to a 61.8 per cent recovery of the 512-point fall from 2003's high to the year's low in January-May.

According to the Fibonacci theory, a retracement follows a sharp fall, but the rise meets with resistance at certain levels -- the main ones are the 38.2 per cent, 50 per cent and 61.8 per cent.

The BSE's gauge ended at a four-month high of 3,335 points on Monday after rising above the downward sloping trendline connecting the peaks of 2002 and 2003.

It is down 2.2 per cent since the start of 2003, making it one of the few bourses in the world in negative territory this year.

"The rally has strong legs -- there is no divergence as yet with the RSI and the MACD is also above the zero-line," said Mitesh Thacker, chartist with Kotak Securities.

The Relative Strength Index, a momentum indicator, signals a rally is flagging by creating a negative divergence -- a lower top is created when the index has formed a higher top.

The Moving Average Convergence Divergence tracks the difference between the 12-day and the 26-day moving averages constructed along a zero line. When the indicator rises above the zero line, it has bullish implications.

Rally needs to slow

Chartists cautioned that the recent rally could have been too fast and that without a slowdown, key gauges run the risk of forming bearish divergence patterns with their indicators, setting up a correction, chartists said.

"The rise has been too fast, some consolidation of the recent gains is needed or it could create divergences with its momentum indicators," Devanathan said.

In the past two weeks, the index has posted its two highest weekly gains since February 2002.

Analysts say that Satyam Computer Services, India's fourth biggest software exporter, could outperform the downbeat software sector, after it crossed a key moving average.

"It has crossed the 50-day moving average, and it could now target the 200-day moving average," said Devanathan.

Chartists say that the stock could now rise to Rs 220, its 200-day moving average, if it broke the resistance from an intermediate peak of Rs 195. Satyam ended up 0.9 per cent at Rs 180.35 on Friday.

The price chart of Steel Authority of India Ltd, the nation's largest steelmaker, also hinted at solid gains ahead, analysts said.

"If it crosses the Rs 12.50 neckline in the inverted head and shoulder pattern on the quarterly chart, we could see it rise to Rs 20.50," said Kotak's Thacker.

An inverted head and shoulder is a reversal formation that has three distinct bottoms and a neckline. The formation is complete when the index rises above the neckline and the target is calculated by adding the distance from the head to the neckline. SAIL ended up at 14.39 on Monday.