Ask Mint | High probability of a rally with the return of positive sentiments

Ask Mint | High probability of a rally with the return of positive sentiments
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First Published: Sun, Nov 09 2008. 10 16 PM IST

Updated: Sun, Nov 09 2008. 10 16 PM IST
In the week ended Friday, key indices and stock prices gained for the second successive week in the wake of bargain hunting by funds and investors, and growing optimism over the worldwide credit situation. Concerns over the global economic situation prevailed amid more discouraging data on employment and retail sales in the US, and interest rate cuts by the Bank of England and the European Central Bank failed to cheer the markets. In India, however, bargain buying on the bourses seems to have boosted sagging market sentiments. Participating in this bargain buying were foreign funds which have been heavy sellers on Indian bourses so far this year. Interestingly, the US markets registered a fall last week—the Dow Jones Industrial Average fell 4.1%, the Standard and Poor’s (S&P) 500 Index, 3.9%, and the Nasdaq, 4.3%—but Indian markets registered gains.
Though the gains may continue this week too, it is too early to draw any conclusion from the way Indian markets have behaved in the last fortnight because there are some concerns over the global scenario. At this stage, no news is likely to be good news and even a hint of a deterioration could cause a fall on the bourses.
This week, in the US, a deadline for clients to withdraw cash invested in hedge funds will weigh on sentiments and could potentially add to the selling pressure on the bourses. And if results of retailers such as Wal-Mart Stores Inc. continue to disappoint, sentiments could take a hit globally.
Bouncing back: People watch stock prices displayed on the Bombay Stock Exchange building on Thursday. Bargain hunting by foreign funds and investors seems to have boosted sagging market sentiments. Shashank Parade / PTI
Back home, however, purely technically, we will likely see another rally from Monday (probability: 85%), which might take the key indices back in the comfort zone.
The first signs of this rally have already been reflected in the strong closing on Friday and the way markets bounced back reinforces the view that they might see positive momentum. Since the breadth of the market has improved substantially, it further reiterates the view that the undertone on the bourses is now quite positive and some buying interest is emerging.
The Sensex closed very close to its 20-day simple moving average, a positive signal and the first indication suggesting change in market sentiments. Since other key technical indicators such as the rate of change and relative strength index are pointing up, the up-trend on the bourses is likely to strengthen in the coming days. Other indicators such as momentum analysis and fast stochastic oscillators also suggest positive movement in the initial part of the week.
However, according to a classical technical study, since the Sensex closed at 9,964.29 points, which is below the desired closing level of 10,131 points, there could be some uncertainty and volatility on the bourses.
In terms of levels, the Sensex is poised to test its critical resistance at 10,105 points on Monday and a substantial breach of this level or a close above it would ensure a rally on the bourses; the index is likely to face its next resistance at 10,296 points and then at 10,537 points.
The latter will be an important level to watch as a close above this would mean the next resistance level comes only at 10,945 points, at which it might offer strong resistance to the rising Sensex. However, if the Sensex manages to break this level with heavy volumes ,then this will indicate further gains with the next resistance coming at 11,475 points, which would be a key resistance to watch for more cues on the uptrend.
On its way down, Sensex will face a very important and trend-deciding support level at 9,633 points and a close below this should be treated as a sign of weakness on the bourses with a further fall in the offing. Though there will be a minor support at 9,460 points, the next support level to watch is 9,232 points. If the Sensex closes below this level, then weakness would persist, indicating a further fall with the next support at 8,901. This too would be a critical support level and may offer good support to a falling Sensex. But breach of this level would mean some knee-jerk reaction with a likely bounce-back from 8,508 levels.
In the case of the broader S&P CNX Nifty, there is a critical resistance for the rising Nifty at the 3,010 points level. If the Nifty breaks this level with good volumes (probability: 85%), it will trigger a rally of roughly 150 points at least as the next meaningful resistance would come at 3,160 points. If the upward momentum remains strong, then the rally may extend further with the next resistance coming at 3,236 points, a strong resistance level where some profit selling will be initiated.
However, if the uptrend continues unabated, then the next resistance level will come at 3,337 points. On its way down, the Nifty will find its first support at 2,919 points, a moderate support level; it may fall further with the next support coming in the range of 2,880-2,855 points.
This will be a very crucial support band as a close below this level will kill positive sentiments on the bourses, making the undertone gloomy and suggesting a further fall with the next support coming only at 2,690 points. If this level is breached with high volumes, then there will be a knee-jerk reaction, which might take the Nifty to 2,512 points, which will offer very strong support to a falling Nifty.
Among individual stocks this week, Aban Offshore Ltd, Axis Bank Ltd and Bharti Airtel Ltd look good on the charts. Aban Offshore at its last close of Rs970.05 has a target of Rs998 and a stop-loss of Rs937. Axis Bank at its last close of Rs581.60 has a target of Rs597 and a stop-loss of Rs558. Bharti Airtel at its last close of Rs648.05 has a target of Rs667 and stop-loss of Rs621.
From the previous week’s recommendations, Alstom Projects India Ltd recommended at Rs233.20 touched a high of Rs275, which was well above its target of Rs249. Punjab National Bank recommended at Rs420.70 gained 21.9% during the week touching a high of Rs512, meeting its target very comfortably. Yes Bank Ltd recommended at Rs68.20 gained 30.20% during the week, touching a high of Rs88.80, surpassing its target of Rs76 by a huge margin.
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First Published: Sun, Nov 09 2008. 10 16 PM IST