Rally in the making could take Sensex back to 10,000-point levels

Rally in the making could take Sensex back to 10,000-point levels
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First Published: Sun, Dec 07 2008. 10 02 PM IST

Updated: Sun, Dec 07 2008. 10 02 PM IST
The government’s economic stimulus package unveiled on Sunday, following a 1 percentage point reduction in the Reserve Bank of India’s key interest rates and a cut in the administered prices of petrol and diesel, although on expected lines, are timely stock market boosters.
As part of the stimulus package, the government announced an additional Rs20,000 crore in plan expenditure. The package also include elements such as interest subsidy on borrowing by exporters and boosts to infrastructure investments.
The cuts in the repo and reverse repo rates on Saturday would lift the economy both in the short and long terms. A moderate cut in the cash reserve ratio—the proportion of deposits banks are required to keep in reserve—would have been a positive trigger, but since there is enough liquidity in the system, the central bank may use it as a tool at another time.
The fuel prices cuts unveiled on Friday had been overdue because crude oil prices had fallen sharply from July records. Had the cuts been phased out over time, linked to crude’s retreat in the international market, inflation would have been much lower than what it is and economic and fiscal measures to restrict damage to the economy from global turmoil been more effective.
On the whole, these are positive developments for the economy in general and the stock market in particular.
Last week, this column had argued there was a stock-market rally in the making. The week started off on a positive note, although memories of the Mumbai terrorist attack were still fresh. Weak economic data in the form of poor monthly manufacturing activity and dismal performance of exports caused equity prices to head south.
Price check: The fuel price cut was long overdue. Had the fuel price cuts been phased out, inflation would have been much lower than what it is and economic and fiscal measures to restrict damage to the economy from global turmoil would have been more effective. Ramesh Pathania / Mint
Still, there was no panic and volumes did not support a strong downtrend. Equities saw a strong recovery on Thursday, keeping hopes alive for a sustained rally, but fell again on Friday in the absence of fresh triggers and amid nervousness about negative global factors.
Despite minor losses over the week in Bombay Stock Exchange’s benchmark index, the Sensex, and Nifty indices, I still maintain that there is a rally in the making and it is now time for it to kick in. The revised target for this rally would be 10,023 points on the Sensex, which means a gain of at least 1,000 points from current levels.
This may sound a bit too bullish, but this is what some prominent technical studies are suggesting. Even volumes are pointing to a rally. Foreign funds, which have been the catalyst behind every fall, are now turning buyers and as per market regulator Securities and Exchange Board of India data, they remain net buyers to the tune of Rs210 crore so far in December until last Thursday. Technically, on its way up, the Sensex is likely to test its first resistance at 9,180 points, which would be followed by an important resistance level at 9,333 points. If the Sensex on its way up crosses this level with good volumes (probability 85%), then the rally would gather momentum and it would enter positive territory with the next resistance shifting to 9,678.
This resistance level would offer a north-bound Sensex a tough fight, but would not be strong enough to overcome the positive momentum. The Sensex is likely to cross this hurdle, too (probability 80%). If this level goes, then the sentiment would turn positive with the next resistance coming at 9,840 points. This would be a moderate resistance.
However, after this resistance there would be a very crucial resistance level at 10,023 points, which could well be the termination point of this rally (probability 85%).
Investors need to watch this level with caution as some false signals are likely to be generated around here by the momentum. It is not intended to mean the market does not have the potential for gains beyond this level, but further trends can only be analysed in the light of then prevailing circumstances.
If the Sensex falls, then the first crucial support is expected around 8,791 points. If it falls below this level, it could be considered as a negative signal, with 90% chances of more declines, which could hammer the market down to 8,626, which is a moderate support level.
However, if it fails to regain strength and falls further, then the next support level would come at 8,440. This level will be very crucial for a falling Sensex as a close below this level would trigger a knee-jerk reaction that could take the Sensex down to its next crucial support level of 7,697.
In terms of the S&P CNX Nifty Index, there would be a resistance at 2,734 points. This being a minor one, may not offer any significant hurdle.
However, following this level there would be a crucial resistance level at 2,821 points and a close above this level would mean a strengthening of the rally (probability 85%) with the next resistance coming at 2,967 points. This level would be an important resistance level but would be crossed if the volumes remain high with the rising trend.
The next resistance would then come at 3,013 points, which is a strong level, and could be the termination point of the rally.
On its way down, the Nifty is likely to test its first support at 2,671 points. This support level is going to be important and could set the trend in the short term, as a breach of this level would mean more declines, with the next support coming immediately at 2,622 points.
If this level goes, then the next crucial support level would come at 2,548 points, which would be a critical support level for it. A close below this level would be considered negative and may trigger a reaction that would take the Nifty down to 2,200-2,231 points.
Among individual stocks, Maruti Suzuki India Ltd, Shree Renuka Sugars Ltd and Punjab National Bank look attractive on the charts.
Maruti Suzuki at its last close of Rs490.65 has a target of Rs505 and a stop-loss of Rs471. Shree Renuka Sugars at its last close of Rs50.90 has a target of 58 and a stop-loss of Rs43. Punjab National Bank at its last close of Rs446 has a target of Rs464 and a stop-loss of Rs422.
From the previous week’s recommendations, Axis Bank Ltd, recommended at Rs408.50, touched a high of Rs475, gaining over 16% during the week, and met both targets easily. DLF Ltd, recommended at Rs198.40, touched a high of Rs221.45 and met its target of Rs214. Punj Lloyd Ltd, recommended at Rs137.05, touched a high of Rs157, gaining about 15% during the week, and met its target easily.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Sun, Dec 07 2008. 10 02 PM IST