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After last week’s intense, brutal fall, key resistance levels will be tested

After last week’s intense, brutal fall, key resistance levels will be tested
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First Published: Sun, Oct 12 2008. 11 03 PM IST

Updated: Tue, Oct 14 2008. 10 15 AM IST
As far as the stock markets are concerned, the world is divided into two. One, those who think that bulls will become extinct and two, those who argue that they have only gone into hibernation and will come out at an appropriate time as fundamentals and valuations will be back in reckoning once this crisis is over. I belong to the second group.
The fall on the bourses last week was very intense and brutal, but it was not completely unexpected.
In my last column I had mentioned that the Bombay Stock Exchange’s benchmark index, the Sensex, would have its solid bottom at 10,909 points in the short term—so a fall up to that level was well accounted for.
The surprise factor was only for the extra fall beyond that level, which was 669 points in total considering the lowest level and 383 points considering the closing of the Sensex last week.
So, in practical terms, the Sensex behaved along predicted lines last week, and its movement was well accounted for in technical analysis.
During the week there were many twists and turns in the global financial world, and none for the better.
Globally, all efforts to bail out the financial system remained inadequate.
In the case of India, however, an aggressive cut in cash reserve ratio (CRR) and indications of coming injections of liquidity into the system were correct steps at the appropriate time.
All didn’t go well for the Indian economy last week—industrial output and manufacturing data for August were rather shocking.
These numbers were well below market expectations and fared pathetically against corresponding figures for the previous year.
The marginal drop in inflation was also disappointing, as it did not correspond well with slowing industrial activity.
Moreover, Infosys’ earnings announcement also spelled gloom despite the company beating expectations with a 30% rise in quarterly profit. This was because it cut down its forecast for full-year dollar revenues due to the global financial crisis.
Last but not the least, the roller coaster in forex markets, which led the rupee to its lowest level, was also a cause of worry. This can jeopardize the economic outlook for India. Going forward, there is no key data lined up for release this week except the regular dose of inflation numbers on Thursday.
Technically, the markets are looking fragile and key technical indicators suggest that after the breach of solid support for the Sensex at 10,909 points, the “rock bottom” has now shifted to around 8,464 points. However, I won’t say that it is going to come this week, as some recovery is expected.
The week may start on a cautiously optimistic note and key indices may trade range-bound initially and will face an important resistance at 10,827 points.
If the Sensex crosses this hurdle (probability 75%) then there will be further gains, which might take the Sensex close to the next resistance level of 11,186 points, which is a moderate resistance level, but there will be an important and key resistance level at around 11,330 points.
If the Sensex crosses this hurdle with higher rising volumes, then the sentiments on the bourses will turn positive and indicate more gains as the next key resistance level will come only at 11,734 points. There is, however, a trend-deciding resistance at 12,220 points, which might change the course on the bourses.
However, this resistance is a far cry unless some groundbreaking developments take place fundamentally.
Grim scenario: People watch a screen put up on the Bombay Stock Exchange building in Mumbai on Friday. The roller coaster in forex markets, which led the rupee to its lowest level, was a cause of concern. Arko Datta / Reuters
On its way down, there is an important support level at 10,230 points—a fall below this level would mean further fall in Sensex with the next crucial support coming at 9,846 points. This is a strong support level, but if the Sensex closes below this level, it would mean fall with support slipping to 9,595 points.
Still, this will be a moderate support and offer only partial support to a falling Sensex; breach of this level would ensure support only at 9,205 points.
This would be a tough support level, but if breached might cause some sharp knee-jerk reaction on the bourses, which might take the Sensex to 8,798 points.
In terms of the S&P CNX Nifty, the first key resistance level will come at 3,369 points. This is an important resistance level and crossing it would result in a relief rally of more than 100 points (probability 85%) as the next critical levels of resistance will be between 3,493 points and 3,539 points.
The next level of resistance for the S&P CNX Nifty would be at 3,612 points with a trend-deciding resistance at 3,726 points. On its way down, support at 3,202 points would be very important as a fall below this level would mean new lows.
The next key support level would then come at 3,120 points, which is an important support level. A close below this level would mean a bearish trend with the next support coming at 2,920 points.
However, there will be a very solid support placed around 2,796 points.
Summary
This week the trend is expected to be volatile with bargain buying emerging at declines.
The week might start on cautious notes; if the first resistance of the Nifty and the Sensex goes then there would be relief rally.
Watch out for Sensex support at 10,201 points and Nifty support at 3,202 points; a close below this level would be very bearish.
Markets have not yet bottomed out in broader terms though some recoveries are expected in the short term.
There are good opportunities for traders, but for long-term investors (more than two years), limited bargain buying on declines would make sense.
Among individual stocks, State Bank of India (SBI), HDFC Bank Ltd and Steel Authority of India Ltd (SAIL) look good on our charts.
SBI at its last close of Rs1,352.50 has a target of Rs1,392 and a stop-loss of Rs1,301. HDFC Bank at its last close of Rs1,047.75 has a target of Rs1,084 and stop-loss of Rs992. And SAIL at its last close of Rs108.20 has a target of Rs116 and a stop-loss of Rs94.
From our last week’s recommendations CESC Ltd and Alstom Projects India Ltd bombed but Mahindra and Mahindra Ltd missed its target of Rs529 by a whisker as it touched a high of Rs522.
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 12 2008. 11 03 PM IST