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Positive undertone could see markets at higher level

Positive undertone could see markets at higher level
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First Published: Sun, Dec 21 2008. 10 22 PM IST

Updated: Sun, Dec 21 2008. 10 22 PM IST
As predicted, a rally happened on the bourses last week, on improving domestic and global cues. The Bombay Stock Exchange’s (BSE) benchmark index, the Sensex, index hit a high of 10,188.54 points, which was close to my target of 10,196 points. Even the resistance level of 10,076 proved its worth as the Sensex touched a high of 10,073.1 on 17 December and closed at 10,076.43 points on 18 December.
However, the most encouraging part of this rally was volumes, which saw a significant rise. I have often mentioned in this column about the importance of share volume, and the rally bears testimony that unless volumes pick up consistently, sporadic bouts of buying or selling won’t lead to a trend.
The volumes last week on BSE were highest in one year. Even on weekly charts, the average weekly volumes remained high and were roughly twice the average weekly volume of the last one year. This is actually the main trigger behind the current rally, which sufficiently authenticates my view that the worst is over.
Increased volumes mean increased participation of market players and long-term investors should consider this as a turning point. This could sound somewhat bold, but based on market and technical studies, it seems the worst phase is now history and the predictions of 6,000 or 7,000 points of Sensex were baseless. My assessment strongly suggests the market has seen its lows, which shouldn’t be revisited now.
As far as weekly movement of the market is concerned, last week was good on both domestic as well as global bourses. Globally, there were many positive triggers such as 75 basis point cut in the US interest rates and the bailout package for the auto industry, which went well with global economies. One basis point is a hundredth of a percentage point.
However, back home, a sharp fall in inflation was the biggest reason to cheer as it paves the way for further cuts in interest rates, which would surely boost the economy in the weeks and months to come. The fundamental undertone in the economy is now positive and if this rhythm is maintained, we may see even higher levels.
Turning point? The BSE building in Mumbai. The volumes last week on BSE were highest in one year. Even on weekly charts, the average weekly volumes remained high and were roughly twice the average weekly volume of the last one year. This is actually the main trigger behind the current rally in the market. Abhijit Bhatlekar / Mint
Technically, the rally that started two weeks ago is entering the volatile phase, which means that vulnerability to profit-selling would increase, despite the positive trends and momentum. The increased volatility would also be on account of expiry this week of derivative contracts for December.
Since the smooth rollover of open contracts to the next month are expected, I am not expecting any sharp decline. On its way up, the Sensex is likely to test its first resistance at 10,191 points, which will be a moderate resistance. If it closes above this level, the next resistance would come at 10,397, which would be a tougher resistance, but if the momentum remains positive, then this resistance will also be breached. The next resistance at 10,539 points would be strong and the Sensex may pause a while before taking on this resistance level. However, there would be a crucial resistance at 10,781. Investors should watch out for this.
If the Sensex takes a U-turn at this level, then there would be some profit selling on bourses, which might last for rest of the week but would offer good buying opportunities if the fall is not supported by huge volumes. However, any technical correction followed by huge volumes should be considered as an indication of continued selling. But if it closes comfortably above this, then there would be yet another big rally.
On its way down, the Sensex would test its first support at 9,991 points, which would be crucial. A close below this level would mean more losses and the next support for it will be at the 9,812-9,754 points band. This level will also be crucial and its breach could see it slipping to 9,631 points. But a close below this level should be considered bearish with the Sensex targeting 9,304 points as its next big support level.
The S&P CNX Nifty Index on the National Stock Exchange is likely to test its first resistance at 3,112 points, followed by an immediate resistance at 3,158. The former would be a moderate resistance level, while the later would be a strong one.
However, a breach of later would mean signs of continued upward trend with the next resistance coming at 3,213 points. This would be strong and if breached, would mean more gains with the next resistance coming at 3,304. On its way down, the Nifty might test its first support at 3,039 points, an important support level. A fall below this would mean weakness with a level of support coming at 2,954-2,922 points band. However, a close below this would be bearish, signalling a trend reversal in the short term and with next big support coming at 2,811 points.
Among individual stocks, this week Reliance Industries Ltd, Housing Development Finance Corp. Ltd (HDFC) and ICICI Bank Ltd look good. Reliance Industries at its last close of Rs1,351.30 a share has a target of Rs1,397 and a stop-loss of Rs1,312. HDFC at its last close of Rs1,523.80 a share has a target of Rs1,575 and a stop-loss of Rs1,482. ICICI Bank at its last close of Rs472.80 has a target of Rs489 and a stop-loss of Rs450.
From last week’s recommendations, Kotak Mahindra Bank Ltd touched a high of Rs400 and met its target of Rs389 easily. Sterlite Industries (India) Ltd touched Rs314.95, which was comfortably above its target of Rs305. Titan Industries Ltd was the best among all, gaining Rs124 or 14.21% during the week, meeting its target comfortably.
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: Sun, Dec 21 2008. 10 22 PM IST