Share prices are expected to fall this week, with investors likely to pocket profits after the market made a strong showing in recent weeks, dealers said.
Selling pressure may particularly intensify as the market approaches the nearest resistance level of around 7,400 points, they said.
However, ample liquidity is expected to stabilize the broader market to some extent with active interest in select traditional industrial stocks rather than electronics heavyweights.
The market is expected to move to between 7,280 points and 7,480 points this week.
Last week, the weighted index closed up 198.67 points or 2.77 percent after a 1.11 percent increase a week earlier.
Average daily turnover stood at NT$165.61 billion (US$5.24 billion), following an average of NT$136.13 billion the previous week.
"Profit-taking selling was seen in late Friday trade ... That indicates investor sentiment has turned cautious after recent significant gains," Yuanta Core Pacific Capital Management (
During the past six weeks, the local bourse has risen almost 1,000 points or 15.6 percent.
"I expect such caution will continue next week ahead of the critical level of 7,400 points. Market movements may become volatile," Tam said.
Tam said with electronics firms scheduled to report last month's sales next week, investors will watch closely whether the sector has been affected by the current slow season.
"In particular, investors are concerned about personal computer sales amid signs of slow demand," he added.
However, the steel sector is expected to stay relatively stable on expectations that China Steel Corp (
Overall, analysts and investors are still positive about the local market this year.
Merrill Lynch, for, example, has estimated that the benchmark TAIEX will reach 7,500 points soon.
Credit Suisse and JP Morgan, meanwhile, both expect the TAIEX to hit 8,000 points by the end of the year, while Goldman Sachs set an even higher target of 8,200.