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Falling oil prices may provide the trigger for Indian stock market

Falling oil prices may provide the trigger for Indian stock market
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First Published: Mon, Aug 11 2008. 09 33 AM IST

Updated: Mon, Aug 11 2008. 09 33 AM IST
Happy days are here again. That’s likely to be the song on everyone’s lips after Friday’s sharp rally on the US bourses and a fall in crude prices to around $115 (Rs4,853) a barrel—at least 20% below its record high in July.
Things look good from the Indian perspective too because lower oil price eases the country’s concern over surging inflation, which, in the last week, topped 12% for the first time in 13 years with no signs of having reached its peak.
Oil, however, is not the only culprit as far as inflation is concerned—high commodity prices have also contributed equally to the demon of inflation. Together, they shook the Indian economy, which was once considered only next best to China.
With falling oil prices, the pressure of monetary tightening might ease in the coming months and this could boost India’s economic growth, which has started to slow owing to high rates of inflation.
Moreover, with the busy season for the economy drawing near and with good kharif or monsoon crop, lower oil prices may be the catalyst for the beginning of an upturn in the Indian economy. This is, in a way, the trigger the markets were waiting for.
Favourable tide: Stock traders in Mumbai. (Photograph by Santosh Hirlekar / PTI)
This week, the markets are likely to resume on a positive note, tracking gains on the US bourses and the fall in crude prices. The gains are likely to extend till the middle of the week, and may carry on further if the trend on global bourses remains positive and oil maintains its southward journey.
This week, data related to industrial output and manufacturing output for June will be watched very closely when they are released on Tuesday as this will provide some indications on where the economy is headed. Industrial output growth is estimated to be 5.1% in June, compared with 3.8% in May. If industrial output growth rate comes in above 6.1%, then it would boost investor sentiments further and trigger a rally.
Technically too, the markets are looking positive. The Bombay Stock Exchange’s benchmark Sensex index is likely to test its recent high of 15,412.8 points soon—at the last close of 15,167.82, this is 244.98 point away—and this is a moderate resistance level. If the rising Sensex crosses this level, which looks likely, there will be sharp gains on the bourses, which might take the Sensex up to 15,815 points. This too is a moderate resistance level and may offer only limited resistance to the northward trend and not be a big hurdle. If the Sensex meets with a strong resistance at this level and fails to close above it on at least two occasions, despite crossing it, then it will mean a reversal in the short-term trend. The probability of this situation, however, is low at 0.25. If the Sensex closes above this level, then it will come across a strong resistance at 16,232 points. And this level is expected to pose a strong hurdle to the rising Sensex (probability of this being so is 0.75, which is a very high probability). This level should be watched very closely as this might be the level where the rally terminates temporarily and attracts profit selling. However, if the Sensex manages to cross this hurdle too, and closes above this level, then the gains will extend upto 16,644 points. But if the index retraces from this level, then it may fall upto 15,752 points.
Taking stock at current levels, the critical support level for the Sensex on its way down is first at 15,036 points, which is a moderate support level. A close below this level would mean more declines, which might take it down to 14,456 points, which is a strong support. But the rock bottom for the Sensex is now placed at 14,091 points.
For the S&P CNX Nifty, the benchmark index of the National Stock Exchange, the chances of sharp gains look very strong, with a predictable rally of more than 120 points from current levels as the next key resistance for it is placed in the band of 4,630-4,653 points, with the upper limit being the stronger one. If the Nifty crosses this, there will be immediate resistances at 4,688 and 4,720 points. If the index closes above this level, there will be a sustained rally, which might take the Nifty to 4,947 points. However, the level of 4,720 should be watched very closely, as this level may pose a strong hurdle for the rising Nifty. A comfortable close above this level will be a bullish signal. Importantly, now that the exponential MACD (20, 60, 9) is heading close to the zero line, if the Nifty crosses over to the positive zone, then this will also be a bullish signal on a broader horizon. MACD, or moving average convergence and divergence, is a tool used to understand stock or index movements by plotting moving averages across various time frames (in this case, a 20-day period, a 60-day period, and a nine-day period are used).
If the Nifty falls, then in the current situation, it will first find support at 4,464 points, which will be a moderate but important support level. If this is breached, then the immediate support will be at 4,421 points. However, a close below this level will be negative and bearish in the short term, with the next target of support being 4,361 points.
Among sectoral indices, the BSE Midcap index (an index whose constituents are companies with mid or medium market capitalization) is signalling an up trend with the resistance coming in at 6,021, 6,257 and 6,511 points, while support is expected at 5,649 points and 5,470 points. The BSE Smallcap index (composed of firms with low market capitalization) is expected to test its first resistance at 7,327 points followed by the next resistance at 7,610 points and a very important resistance at 7,939 points.
This week, the BSE Bankex (the index of bank stocks) will be the one to watch among the sectoral indices, as it is likely to outperform even the broader market measured by the BSE Sensex and the S&P CNX Nifty. The Bankex, at 7,395.03, will test its first resistance at 7,656 points, following which the next important resistance will come up at 8,122 points and 8,211 points. If these levels are crossed, then there will be a sharp rally in banking stocks.
Among individual stocks, this week Patel Engineering Ltd, Development Credit Bank Ltd and Tata Power Co. Ltd look good on our charts. Patel Engineering Ltd, at its last close of Rs440.05, has a target of Rs465 and stop loss at Rs412. Development Credit Bank is a very good technical bet, with multiple targets across this week. At its last close of Rs55.65, it has its first target at Rs63 and next at Rs70 with stop loss at Rs43.
Tata Power, which has been an underperformer during the last two weeks, is likely to swing into action this week, with a target of Rs1,088 and stop loss at Rs1,028. The current price of the stock is Rs1,059.50.
From our previous week’s recommendations, Century Textiles and Industries Ltd, recommended at Rs491.25, touched a high of Rs559.60, gaining almost 14%, which was well above its target of Rs516. Tech Mahindra Ltd, recommended at Rs756.25, touched a high of Rs799.8, which too was well above its target of Rs778. Sterlite Industries (India) Ltd, recommended at Rs632.30, almost met its target of Rs654 by rising to a high of Rs651.
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, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Mon, Aug 11 2008. 09 33 AM IST
More Topics: Oil | Price | India | Stock | Market |