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This week is going to be critical in deciding the markets’ course

This week is going to be critical in deciding the markets’ course
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First Published: Sun, Oct 26 2008. 11 29 PM IST

Updated: Sun, Oct 26 2008. 11 29 PM IST
It’s finally going to be over! This expression is only for October, which is the month of jinx for stock markets, because of the precedents including crashes in 1929 and 1987, as well as the slide on 27 October 1997 and 13 October 1989 (which, incidentally, was a Friday).
India will remember October for reasons other than festivals as the Bombay Stock Exchange’s Sensitive Index, or Sensex, fell 4,294 points till 24 October from the closing of 30 September. This was the biggest monthly fall in the history of Indian stock markets. The big question now is—what next?
Sentiment on bourses suggests the worst may not be over but logic suggests most of it is now is, and the debate over recession will slow at some stage and investors will again focus on fundamentals and valuations.
In India, things are not as bad as reflected on the bourses. Even a modest gross domestic product (GDP) growth rate of 7% or above would be commendable in a scenario when the entire world is sinking under recession fears. It is worth mentioning that the estimates for S&P 500 third quarter earnings growth has fallen to an 11% decline from a 2.9% decline seen at the beginning of October, whereas in India, we are still seeing positive earnings with a majority falling in line with expectations.
As far as liquidity is concerned, it is now placed at comfortable levels with ample cash in the system. Inflation is southbound and likely to fall sharply if petroleum prices are cut due to the fall in global crude oil prices.
The biggest worry at this point is rupee’s fall against the dollar, but that, too, is near its peak. The dollar index—which pegs it against a basket of currencies—that hit a two-year high is now showing some signs of moderation.
However, this week is going to be critical and may help in answering the big question mentioned earlier. This week the US Federal Open Market Committee is scheduled to begin a two-day meeting on Tuesday to decide on interest rates. Going by the interest rates futures, a cut of 50 basis points is already factored in and markets would be buoyed by a more aggressive rate cut, which could also be a positive trigger for the ailing US economy. One basis point is one-hundredth of a percentage point.
I think that would be the trigger for India and other emerging markets as it would boost foreign investment. Also, markets would be eagerly looking for more updates on the second economic stimulus plan. If it becomes a reality, then along with the lowest interest rates in the last 40 years, the US economy might finally see a ray of hope. Back home, the disappointment over the credit policy should be seen positively as the flat policy announced last week indicates we are not in a state of war and the earlier aggressive measures taken by the Reserve Bank of India would soon deliver the desired results.
Technically, the markets are still in a bear grip and after Friday’s fall, they are close to a rock-solid support level of 8,464 points mentioned in the last week’s column. However, since the downward momentum in the market is strong, knee-jerk reactions on the bourses cannot be ruled out. I still feel the level of 8,464 points holds a lot of meaning. It would remain valid unless the Sensex closes below this. Any knee-jerk reaction below this level might not change the strength of this level.
This week, key short-term technical indicators are currently heavily oversold and indicate a bounce-back or consolidation initially. The 14-day relative strength index (RSI) is clearly indicating a bounce-back. Whenever the RSI has fallen to these levels in the past, there was a rally. This week, too, technical indicators are now suggesting a bounce-back or consolidation and if it is supported by good volumes, the recovery may gather momentum and result in a rally.
This week the Sensex, on its way down, may test its first support at 8,464 points, which is likely to hold despite strong negative momentum. Intra-day knee-jerk reactions will not affect its sanctity but a close below this would be negative, as the next important support will come at 8,081 points, followed by another strong support at 7,569 points.
On its way up, the Sensex is likely to test its first resistance at 9,196 points. This would offer limited resistance. But a close above this would improve sentiments with the next resistance coming at 9,562 points. This will be followed by an immediate resistance at 9,697.40 points, and a close above this level would decide the short-term trend since a close above this would be considered bullish.
For the S&P CNX Nifty index on the National Stock Exchange, the first support is likely to come up at 2,415 points, which is an important support level, as a bounce-back from this would be considered meaningful and critical in deciding the short-term trend. But a close below this would be negative as the next and a key support level would then come up at 2,280 points. In the current circumstances, the market is likely to find strong support at this level.
However, if the market closes below this, there would be more trouble on the bourses, as the Nifty would then test its bottom near 2,128 points.
On its way up, the Nifty is likely to test its first resistance at 2,651 points, followed by its next resistance at 2,741 points. If this level is breached the next resistance would come at 2,879 points, followed by an immediate resistance at 2,918 points. A close above this would ensure the end of bearish sentiments on the bourses in the short term.
Among individual stocks this week, Bank of India, Satyam Computer Services Ltd and Siemens Ltd look good on the charts. Bank of India at its last close of Rs227.85 has a target of Rs241 and stop-loss of Rs209. Satyam Computer at its last close of Rs286.85 has a target of Rs301 and stop-loss of Rs267. Siemens at its last close of Rs265.05 has a target of 278 and stop-loss of Rs249.
From the last week’s recommendations, Larsen and Toubro Ltd touched a high of Rs904.70, which was well above its target of Rs828. Yes Bank Ltd touched a high of Rs85 but missed its target of Rs87 by a whisker. Bombay Rayon Fashions Ltd also missed its target of Rs197, touching a high of Rs194.
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, Oct 26 2008. 11 29 PM IST