Last week was an action-packed one for the Indian stock markets with lots of drama, misery, suspense, thrills and hope.
The sharp rally on the Bombay Stock Exchange (BSE) following the Congress party-led United Progressive Alliance government’s comfortable win in the trust vote, a relatively stable inflation and, finally, a sharp drop in global crude prices, led to a comfort rally globally that not only lifted investor mood, but also brought back some cheer into the Indian markets.
Oil, which was a big worry, witnessed a sharp fall in prices, settling at a seven-week low of $123.26 (about Rs5,200) a barrel on the New York Mercantile Exchange.
Adding to that were a spate of good corporate results and a stable inflation level in India at 11.89%.
But, the bomb blasts in Bangalore on Friday and the next wave of blasts in Ahmedabad on Saturday, while shocking and worrisome in terms of the ease at which major Indian cities are being targeted, might not deter investor confidence.
Both foreign and domestic buyers see India’s credentials as too strong and stable and that view is unlikely to be dented by such attacks.
While Friday’s sharp fall in the Indian stock markets could be attributed some extent to the reactions to the blasts in Bangalore and Monday morning trading could be influenced by what happened in Ahmedabad on Saturday, the markets are likely to brave such acts of terrorists this week.
Close watch: A file photo of people watching a screen display on the BSE building in Mumbai. Monday morning’s trading could be influenced by the serial bomb blasts in Ahmedabad on Saturday.
This week will be critical as the periodic review of the credit policy by the Reserve Bank of India (RBI) is scheduled for Tuesday.
In view of high rates of inflation and the limited impact of monetary tightening by the government and RBI so far, it sounds logical for the central bank to continue with a hike in bank rates, the so-called repo rate as well as the cash reserve ratio, as inflation has only started to stabilize and hasn’t come down as expected.
Traders and investors expect the central bank will increase its repo rate or the rate at which it lends cash to banks, by 25 or 50 basis points (hundred basis points make one percentage point), with perhaps another increase factored in later this fiscal year.
A rate hike may trigger selling initially, which would be more of the knee-jerk variety. However, since a hike has already been factored in on top of valuations for many stocks, the markets will likely bounce back rather than go looking for a new bottom. I would expect the market to go into a consolidation phase until the credit policy review is over and done with.
This view is also shared by a technical analysis.
It is expected that the market would remain out of the danger zone as long as the Sensex, the benchmark index of BSE, closes above 14,041 points. If the Sensex closes below this level on any day during the week, the sentiments might turn negative.
This figure is an important support level for intra-day as well and investors may need to take appropriate caution below this level. However, if during intra-day the Sensex bounces back from 13,923 and closes above 14,041 points, then it would turn the sentiments positive again.
However, a further fall below 13,923 points would indicate a bearish trend with the next support in sight is at 13,553. This is likely to be an important support level, and should offer a reasonably strong bottom to the Sensex. However, if that level is broken, the stock market would then take the Sensex down to 13,272 and then to 13,089.
On its way up, the Sensex is likely to test its first resistance at 14,482 points, which is a moderate resistance level with the second, and an important one, expected at 14,604. If the Sensex closes above this level with rising volumes, the sentiments would turn positive and the index would aim for higher levels. The next key resistance would come up at 15,075 points, followed by a strong resistance at 15,396.
The S&P CNX Nifty index of the National Stock Exchange is likely to face its first resistance at 4,386 points, which is a very important level. If the Nifty crosses this level and closes above it, the sentiments would turn cautiously positive with the next resistance in sight at 4,459 points. This would be a moderate resistance level and the next level at 4,532 would be an important one. If it closes above this level, it would jump-start the next leg of a rally with targets of 4,654 and 4,703 points in sight.
Based on this analysis, the trading strategy for this week could be to go slow—wait and watch initially but, maintain a positive bias. Go long on dips with strict stop-loss below critical support levels.
Among sectoral indices, the BSE Midcap index has its first resistance at 5,720 points and the next at 5,857 points, following which, there would be a sustained rally, which might take the index to 6,200 points. On its way down, the first support is expected around 5,483 points, followed by supports at 5,425, 5,369 and 5,254.
The BSE Small Cap index has a strong resistance level at 6,928 points, following which there could be a rally. The index would face its next resistance at 7,202 points and another at 7,408 points. Last week, the BSE Metal index proved to be a dark horse, gaining 14.25%.
Among individual stocks, ABB Ltd, Sterlite Industries (India) Ltd and Century Textiles and Industries Ltd look good on charts. ABB, at its last close of Rs834.15 a share, has a target of Rs869 and a stop loss of Rs792. Sterlite, which last closed of Rs602.85, has a target of Rs634 and a stop loss at Rs571. Century Textiles, at its last close of Rs467.30, has a target of Rs496 and stop loss at Rs433.
From our last week’s recommendations, Tata Tea Ltd touched a high of Rs787.90, which was well above its target of Rs758. Aban Offshore Ltd touched a high of Rs2,835, beating its target of Rs2,732 very easily. Bombay Rayon Fashions Ltd, recommended at Rs299.85, rose to a high of Rs338.95, gaining some 13% and above the target of Rs321.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org