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Derivative contracts expiry promises action

Derivative contracts expiry promises action
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First Published: Sun, May 27 2007. 11 58 PM IST
Updated: Sun, May 27 2007. 11 58 PM IST
After a firm start, equities slipped later during the week on profit-selling due to concerns over valuations of Chinese stocks. A lack of positive triggers on domestic bourses also led to some profit selling by funds and traders.
Fears over Chinese stock markets are not new but concerns were heightened when former US Federal Reserve chairman Alan Greenspan warned that he feared a “dramatic contraction” in China’s stock market and said its stock market boom was “clearly unsustainable.”
His views pushed stocks lower across all Asia as it reminded investors of the huge global equity sell-off on 27 February that was triggered by the sharpest drop in China’s main stock index in almost a decade. The concerns subsided later though due to merger-fuelled rally on US bourses, which is likely to continue this week, too, in a holiday shortened week (US markets are closed Monday for Memorial Day.)
However, Greenspan’s comments have opened a Pandora’s box, which could keep haunting investors for some time to come as Chinese economy is already under the scanner due to its recent monetary policy decisions.
This week, some important US data is due, which may affect market sentiments. Apart from the monthly report from The Conference Board on its index of consumer confidence on Tuesday, revised data on the health of the US economy in the first quarter will be released on Thursday, while the most important, the May jobs data, will be released on Friday. If May data show improvement, which is very much expected, it could fuel further gains on US bourses, which could then mean more gains on global bourses also.
Fundamentally, this week is very important for Indian bourses also as the final quarter (January-March) GDP and full 2006-07 GDP will be released on Thursday. This data will be watched carefully to see whether the full-year number matches the government’s early estimate of 9.2%. Also, some important earnings are due this week from Larsen and Toubro Ltd, Mahindra & Mahindra Ltd and Unitech Ltd, which may give impetus to these stocks. Other than that, the regular weekly dose of inflation numbers will also be an important event to get clues about where markets might be headed.
The Indian bourses would see the monthly expiry of derivatives contracts on Thursday and a lot of action is promised ahead of that. The rollover to the next derivative cycle has already begun and it has been smooth so far. However, there are short positions also and traders will be watching those carefully.
Technically, the market is headed up and some more gains are likely on bourses ahead of enhanced volatility towards the middle of the week due to expiry of derivative contracts. The rising Sensex is likely to witness resistance at 14,478 points, which is an important resistance, and if the rising Sensex scales past this level, then it would aim for its next big resistance level of 14,724 points. This is the most critical level and, if the Sensex crosses this level too, then it may move further to touch an all-time high level of 15,127 points.
On the down side, the Sensex is likely to face its first support level at 14,240 points, which is a moderate but an important support level. However, if this support is breached, then there could be a further fall and the Sensex would test its next support level of 14,040 points. This is a key support level. Below this level would be a danger zone for bulls, as the short-term trend may turn bearish for the time being.
Individual stocks
On our technical radar this week are companies such as Reliance Capital Ltd, State Bank of India, Ultratech Cement Ltd and Century Textiles Ltd. Reliance Capital at current market price of Rs976.75 has a good short-term, upward potential as the stock may touch Rs1,022 with a stop loss of Rs950. State Bank of India at Rs1,298 has a short-term target of Rs1,340 with a stop loss of Rs1,258, while Ultratech Cement, which is currently in consolidation mode, has strong resistance at Rs849. Once this resistance is broken, the stock may witness a rally, which may take it up to Rs900. Century Textiles, at Rs628, has good short-term potential, too, and may touch Rs645 with little effort.
Mintrecap
From our last week’s technical picks, Larsen & Toubro Ltd, recommended at Rs1,727 touched a high of Rs1,778. However, it is still below its target of Rs1,790. Mahindra & Mahindra, recommended at Rs732, touched a high of Rs746.10, and it still has the potential to move and may even better last week’s target. The stock remained in consolidation phase due to its results, scheduled for Monday. Mphasis Ltd, recommended at Rs318, touched a high of Rs325 but remained substantially below its target of Rs340.
Vipul Verma is a Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Sun, May 27 2007. 11 58 PM IST
More Topics: Money Matters | Derivatives |