Equities slumped last week despite several positive India-related triggers such as falling oil prices, lower inflation, lifting of the ban on nuclear trade and the better-than-expected industrial and manufacturing data. The fall was mainly due to heavy selling by foreign funds and weak global cues.
Bubble burst: A file photo of traders at the New York Stock Exchange (NYSE). Lehman Brothers, listed on NYSE, has lost 94% of its market value this year after record losses from investments tied to mortgages. David Karp / AP
Foreign funds, which drove the 2007 rally, now seem to be selling on every rise. They sold $728 million (Rs3,334 crore) of stocks more than they bought so far in September with cumulative net sales for 2008 reaching $7.8 billion. This explains the reasons for a persistent fall in the Indian stock market. It has also led to a sharp fall in the value of rupee against the dollar. Moreover, a worsening of financial crisis in the US too added to the woes of domestic investors. The latest development is the uncertainty over the fate of US investment bank Lehman Brothers Holdings Inc., which kept investors on tenterhooks about the health of the US financial system. Lehman has lost 94% of its market value this year after record losses from investments tied to mortgages.
This week, all eyes would be on the US Federal Reserve’s policy-setting meeting on Tuesday. While the Fed is widely expected to keep interest rates steady at 2%, investors will scrutinize its accompanying assessment of the economic outlook for clues about corporate profit prospects. This may keep the markets on hold globally.
Meanwhile, the Indian economy, which is facing the heat of high rates of inflation and slowing down of industrial activity, is causing new worries among investors. Now, with a sharp fall in value of the rupee, the inflation scare could also resurface, despite lower oil prices — India will have to spend more in rupee for importing oil. Overall, in view of the latest economic situation, the undertone on the markets remains extremely subdued despite the fact that the market had more positive triggers than it had anticipated.
This week the mood is likely to remain sombre. This view is shared by a technical study of the markets that suggests weakness in the near term. Key technical indicators point to the market heading towards the “danger zone”, which it has not yet entered. If equities witness further fall, then the outlook of the markets may change. The wider moving average convergence/divergence technical indicator, which was showing some strength, is also now headed down and is in a crossover mode. Since the market is already below its 50-day simple moving average, the undertone has turned weak and any further fall would only make matters worse. Going by the supports and resistances, on the down side, the Bombay Stock Exchange’s benchmark Sensex index is now likely to test its first crucial support at 13,722 points. If the falling Sensex holds this support and bounces back, then some strength would return to the market. However, if it closes below this level, it would then test the next immediate support at 13,678 points, which will be a decisive support and a close below this would indicate further declines. And, in case of another fall, the next support is likely to come up at 13,454 points. If this level also goes, then the next support level would come at 13,149, which is again a very critical one. A close below this level would mean that the Sensex would test its recent lowest level of 12,514.
Going by probabilities, there is a 70% chance that the Sensex would fall below its first support level of 13,722 and in that case, there would be an 80% chance that it would breach the next immediate support level too. However, the probabilities of the index finding support around 13,454 points are as high as 75%.
On the rising side, the Sensex is likely to test its first resistance at 14,280 points. This, being an important level, is required to be closely watched as any close above this level would mean more gains in the Sensex. That might bring the Sensex to its next resistance level at 14,443 points. If the index crosses this level too, then there is another resistance level at 14,660 points, which, if crossed, would change the outlook of the Sensex in the immediate term.
The National Stock Exchange’s S&P CNX Nifty index is now too close to its first support level of 4,191 points. This is an important support level, but may go since the market trend is looking weak. If the Nifty closes below this level, then there would be an immediate support level at 4,156 points, which is a moderate support. However, if this support level is broken, and the index closes below this level, then there would be further declines and the Nifty might find its next crucial support only at 4,093 points. If this level is also broken, then the next important and solid support level would come up at 3,989 points, which is most likely to provide a falling Nifty some solid base. But a close below this level would mean the Nifty might test its recent low of 3,790 points.
On the upside, there is a very important resistance for the Nifty at 4,307 points, a close above this level would change the outlook of Nifty in the short term with more gains in the offing, which might push the Nifty to 4,422 points. A close above this level would be a bullish signal and would indicate more gains.
Among sectoral indices, both the BSE Mid-Cap and BSE Small-Cap indices are showing weakness in the short-term with further declines likely.
Only the BSE Bankex and BSE Auto indices are showing positive momentum at present and, in view of the general market weakness, they can outperform the broader market.
Among individual stocks, Bharti Airtel Ltd, Tata Motors Ltd and Union Bank of India look good on charts. Bharti Airtel, at its last close of Rs778.75 a share, has a target of Rs797 and a stop-loss at Rs752. Tata Motors, at its last close of Rs413.15 a share, has a target of Rs428 with a stop loss placed at Rs395. For Union Bank, at its last close of Rs150.70 a share, the target price is Rs158 and stop loss Rs141.
From our last week’s recommendations, Bharat Electronics Ltd touched a high of Rs1,000 and met its target of Rs969 a share very comfortably. NTPC Ltd touched a high of Rs192 a share, which was well above its target of Rs185. Tata Power Co. Ltd too went above its target of Rs1,110 a share and touched a high of Rs1,168.
To read all of Vipul Verma’s earlier columns, go to www.livemint.com/aheadoftheticker
Vipul Verma is a New Delhi-based independent investment adviser. Your comments and questions to this column are welcome at firstname.lastname@example.org