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Markets likely to see consolidation this week; US data to be crucial

Markets likely to see consolidation this week; US data to be crucial
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First Published: Mon, Nov 24 2008. 12 09 AM IST

Updated: Mon, Nov 24 2008. 12 09 AM IST
Equities and key indices suffered fresh losses last week as funds and investors dumped stocks tracking the turmoil in global economies. US stocks, which fell sharply during the week, drove the markets lower globally and aided negative sentiments. Growing troubles at Citigroup Inc. added to market woes, reinforcing fears that the worst is far from over while worries over the fate of US auto makers weighed down market sentiments.
India’s own situation was somewhat neutral, as in, there was no bad news per se. Persistent selling by foreign funds and the continued depreciation of the rupee remain major problems, but falling inflation continues to reinforce the market’s belief that an interest rate cut from the Reserve Bank of India could be just around the corner. This sentiment is likely to help boost the Indian stock markets in the short term.
Consolidation ahead
As a result, markets are likely to see some consolidation this week, prior to the Thursday Thanksgiving holiday in the US. Usually the Friday after Thanksgiving kicks off a holiday shopping season in the US and will be closely watched for consumer sentiment signals. The return of consumers is what the market really wants, so, if they stay home, it could turn out much more bad news.
Moreover, I expect some consolidation and gains due to expiry of derivative contracts, as investors would cover some of the open short positions.
Any further gains on bourses would trigger short covering in index future also and this might aid the rise.
Technically speaking
Technically, the market is in the oversold zone and Friday’s rally could extend to Monday as well. This feeling of comfort is partly due to the fact that the Bombay Stock Exchange’s benchmark index, the Sensex, closed above its critical resistance level of 8,950 points, which indicates a strength in Friday’s recovery.
Bailout plea: The General Motors headquarters in Detroit, US. Worries over the fate of US auto makers—the Big Three—weighed down US market sentiments. The country’s stocks fell sharply during the week. Carlos Osorio / AP
Besides, the closing of the gap in stock charts that looked like two candlesticks on Thursday from a sharply lower opening is also a positive signal.
However, despite positive signals and chances of some initial gains, there does not seem to be a positive atmosphere building in the daily charts. This clearly means that the recovery is merely a technical pullback as of now and does not represent any change in trend or sentiments.
The Sensex on its way up is likely to test its first resistance at 9,230 points, which is a moderate resistance level, and a comfortable break of this resistance level would be a positive signal as it would indicate more gains. A close above this level would be a more positive signal for markets and this would push the next resistance level to 9,545 points. This level is a crucial level, and might offer strong resistance to a rising Sensex.
Investors would need to watch this level very carefully as a breakout above this level with good volumes would be considered positive. If there is just touch-and-go kind of movement around this level, then it will signal weakness.
Volume watch
Volumes at this level are critical for two reasons. The northward momentum in the Sensex due to positive global cues would start fading and the market would need fresh triggers for charting its next leg of the rally, and this will happen only when there is good concentrated buying, which, in turn, would get reflected by gains with higher volumes.
If rising prices are not supported by rising volumes, then the recovery or pullback starts weakening, giving fresh sell signals.
Therefore, the implication of volumes becomes more important to understand the levels. If the Sensex manages to cross this hurdle, then there would a short rally up to 9,892 points. This would be a trend-deciding resistance. A close above this level would decide the short-term trend on the bourses as the undertone would turn very positive.
On its way down, the Sensex would test its first support at 8,819 points. This is a minor support level and may be breached by momentum selling. However, a close below this level would be a technically weak indication with the next support coming at 8,466 points. This would be a moderate support level but would offer decent support to a falling Sensex. A fall below this level would find a trend-deciding support at 8,312 points, which would decide the short-term future of Sensex.
If the Sensex closes below this level then there could be sharp fall with the next support coming at 7,686 points, which too would be a moderate support and may not arrest the fall. However, a bounce from this level would be very positive.
Nifty forecast
For the S&P CNX Nifty, there is a very important resistance at 2,771 points. If the Nifty crosses this level and closes above it, there could be a rally, which might take the broad-based 50-stock index to 2,884 points. This would be an important level to watch as a close above this would be a bullish signal with next resistance target at 2,968 points.
On its way down, the Nifty would find its first support at 2,660 points. Being a minor support, this level may not have enough strength to withstand a momentum-led fall.
A close below this level would mean a further fall as the next support would come at 2,560 points.
This would be an important support and offer a decent floor for the falling Nifty. In case this level also breaks, then there would be a very critical support at 2,503 points. Any fall below this could trigger a knee-jerk movement with the fall extending sharply intra-day.
Individual picks
Among individual stocks, ACC Ltd, Bank of Baroda and Siemens Ltd all look good on charts.
ACC, at its last close of Rs399.60 a share, has a target of Rs418 and stop-loss of Rs471. Bank of Baroda, at its last close of Rs268 a share, has a target of Rs284 and stop-loss of Rs246. And Siemens, at its last close of Rs275.65 a share, has a target of Rs288 and stop-loss of Rs256.
From our previous week’s recommendations, Tata Tea Ltd touched a high of Rs539 a share, almost meeting its target of Rs540. Reliance Communications Ltd touched a high of Rs223 a share and missed its target of Rs232 but still qualifies as a valid recommendation. Bank of India witnessed volatile movement and triggered its stop-loss.
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: Mon, Nov 24 2008. 12 09 AM IST