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A ray of hope for Indian markets

A ray of hope for Indian markets
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First Published: Mon, Jul 21 2008. 10 22 AM IST

Updated: Mon, Jul 21 2008. 10 22 AM IST
Finally, after a long bearish spell, Indian markets saw a ray of hope as the benchmark Sensex index of the Bombay Stock Exchange ended Friday with gains of 165.56 points over the previous week’s closing. The recovery looks sharp when compared with the low of 12,514.02 points it plumbed two weeks ago.
Interestingly, the gains were in contrast to how the week played out on other key Asian markets such as Hong Kong where the Hang Seng index was down 320 points, Tokyo where the Nikkei was down 236 points, Taiwan where the index was down 429 points and Malaysia where the benchmark was down 45 points. Even the main index in China, which saw some smart gains during the week, ended 82 points lower.
India outshone all its regional peers and ended on a positive note despite political instability looming large and not much support coming from the funds. Domestic and overseas funds remained net sellers in aggregate till Thursday. (Friday’s figures will be released on Monday).
The reversal of the trend and a change in sentiments can be attributed to lower-than-expected inflation numbers and a sharp drop in global crude oil prices, which eased fears of runaway growth in inflation and, thus, calmed investors, who were fretting about a further monetary tightening that would lead to a sharp hike in interest rates.
Global crude oil prices fell more than $19 (Rs813) from last week’s high of over $147 a barrel. In percentage terms, the price of crude sank almost 13% from its record high on 11 July to Friday’s session-low. That was a huge comfort to sagging sentiments as investors were gearing up to see oil at even higher levels.
A file photo of stock traders in Mumbai.The?gains in India last week were in contrast to the losses in several Asian?markets (Photo by: Rajesh Nirgude / AP )
Sharp gains on the US bourses following better-than-expected results of major banks and a decision of the Securities and Exchange Commission to limit certain types of short selling from Monday in the stocks of 19 major financial companies, including all major investment banks and mortgage finance firms Fannie Mae and Freddie Mac, added to the positive sentiments on global markets.
This week, the Indian market will look for further leads, but growing political uncertainties ahead of the government’s vote of confidence on 22 July will keep tabs on the momentum and may trigger some profit selling. However, on technical grounds, the market is poised to gain further after some brief profit taking.
According to a key technical study, the Sensex and the S&P CNX Nifty index of the National Stock Exchange may gain for two weeks before the rally that started last week fizzles out. However, it is worth noting that gains stretching two weeks does not mean the markets will gain on all the days of the week. It means that both indices are likely to close this week and next higher.
Technically, on its way up, the first resistance for the Sensex is likely to come at 13,763 points, which will be an important resistance level. If the Sensex breaks this level, then it will enter a trading band of roughly 300 points with critical resistance at 14,052 points. It is expected that the Sensex will consolidate between these two levels.
If the Sensex breaks out on the upper level of the trading band, which is at 14,052 points—that has a probability of around 70%—and closes above it, then there could be a sharp upward movement of around 500 points, which may bring the Sensex to its next, and critical, resistance band of 14,553-14,671 points.
However, if the Sensex falls due to any unforeseen circumstances such as political instability following the confidence vote in Parliament, fresh tensions between Iran and Israel, or any setbacks in the earnings of key companies, then the gravity of uncertainty will rule.
In terms of support levels, the Sensex will find its first support at 13,239 points, which is likely to be strong. If it breaks this support, the next support level will come at 13,021 points, which will also be a strong support. If the Sensex closes below this, then there will be trouble as the strong rally seen during the later part of last week will weaken considerably and positive sentiments on the markets will fizzle out.
In Nifty’s case, the first resistance is very close at 4,122 points, and this, being a moderate resistance, is likely to be breached (probability 80%), with the next key resistance expected at 4,217 points. If the Nifty crosses this hurdle, it will face a crucial resistance at 4,327 points. Any close above this level with higher rising volumes would trigger the next leg of the rally, which may take the index to 4,461 points.
On its way down, the Nifty will face its first support at 3,969 points, which is an important support level and should hold under normal circumstances. However, if it closes below this level owing to abnormal circumstances, there will be further fall, which might take it to 3,885 points, and then to 3,827 points.
Among the sectoral indices, the BSE Midcap index is likely to face its first resistance at 5,287points, followed by next resistance levels at 5,348 and 5,526 points, and supports at 5,210, 5,169 and 5117 points. The BSE Small Cap Index may test its first resistance at 6,495 points, followed by resistance at 6,604 points and the most critical resistance at 6,904 points. However, in case the index heads down, the first support is likely to come up at 6,428 points, followed by the next support level at 6,367 points and an important support at 6,296 points.
This week’s dark horse could be the BSE Metal Index, which at 11,668.39 points, has a potential to move up to 12,229 points, though on its way up it may face resistance at 11,805, followed by 11,965 and 12,179 points. The index has a downward potential of up to 11,126 points.
Among individual stocks, Tata Tea Ltd, Aban Offshore Ltd and Bombay Rayon Fashions Ltd look good on the charts this week. Tata Tea, at its last close of Rs733.10, has a target of Rs758, and a stop loss of Rs704. Aban Offshore, at its last close of Rs2,678.55, has a target of Rs2,732 and a stop loss of Rs2,608. Bombay Rayon, at its last close of Rs299.85, has a target of Rs321, and stop loss of Rs275.
From last week’s recommendations, despite sharp falls in the initial part of the week, Reliance Communications Ltd bounced back sharply and ended the week with gains and touched a high of Rs448.75, but missed its target of Rs454 by a small margin. Allahabad Bank traded range bound for the entire week. The stock touched a high of Rs59, but missed its target of Rs62. However, Sterlite Industries (India) Ltd, which had a target of Rs677, touched a high of Rs698, well above its target.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments,questions and reactions tothis column are welcome atticker@livemint.com
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First Published: Mon, Jul 21 2008. 10 22 AM IST