Financially the world is moving from bad to worse by every passing day and all markets across the globe, including China, which have recently shown resilience, are on a downward spiral. Till the time the US financial markets are not bailed out with the $700 billion (Rs32 trillion) rescue plan, the situation is going to be critical.
Going by legendary investor Warren Buffet’ observation, the markets were in a “dangerous situation” and on the verge of “breaking down”. The recent collapse of Washington Mutual Inc. and the report that Wachovia Corp., the sixth largest US bank, has began merger talks with potential partners after a 27% drop in its shares on Friday somewhat confirm the view that worst is yet to come.
Unless bailed out timely and adequately, this crisis may have a contagion effect as cracks have started to appear in Europe, where Belgian-Dutch financial group Fortis NV fired its interim chief executive after liquidity concerns pushed its shares to a 14-year low. In London, regulators and politicians were in talks over the future of troubled lender Bradford and Bingley Plc., raising the prospect that a second British bank could be nationalized. Needless to mention the UK had imposed a ban on short-selling some days back to prevent the white-knuckle ride in the market as a fallout of turmoil in US financial markets. The US too imposed a ban on selling short which will expire on 2 October. It would be worth watching whether the US authorities extend the ban.
This week is going to be very crucial for the markets the world over as the fate of the US bailout package is going to be decided. The hopes are that the US government would pass the plan before the opening of Asian markets on Monday or latest by the time the US markets open. Though the bailout plan may trigger an initial frenzy in the global markets, the details of the package and finer points would actually decide the trend on bourses. More than the bailout plan, the conditions attached to it would determine the impact on stock markets as the tussle continues between Democrats and Republicans over the structure of the plan. The Democrats have pushed for the money to be made available in tranches in order to create a legislative check on the programme. US treasury secretary Henry Paulson, by contrast, had wanted to have the full $700 billion at his disposal from the start, arguing that any package had to be big enough to instil confidence in shaky markets. The world would wait to see what future unfolds. Till then, pessimism is going to rule the financial markets.
In India, the economic calendar is quite busy in a holiday-shortened week. On 30 September, data pertaining to fiscal deficit for August, external debt for first quarter of current fiscal year ending September, trade deficit and the balance of payment for the quarter will be released. Apart from these, the weekly inflation number will be released on Thursday and data on India’s forex reserves on Friday. The data related to auto sales in September will also be released, throwing light on the performance and future of auto firms.
Seeking protection: A Wachovia Bank board in Los Angeles. According to media reports, the sixth largest US bank started merger talks with potential partners after a 27% drop in its share price on Friday. Fred Prouser / Reuters
While the trend that these data will show is not known, one thing is for sure—the Indo-US nuclear deal, which has sailed through the US House of Representatives and might clear the Senate soon, will impact the market in a positive way and boost sentiments in the stocks of power and infrastructure companies. However, still the US bailout package would be the biggest trigger for the market.
Technically, the markets are looking weak and unless the bailout plan gets cleared, markets may extend the fall initially. The Sensex, the Bombay Stock Exchange’s benchmark index, is likely to test its first support level at 13,032 points. If this level breaks, then the undertone on the bourses may weaken further and the Sensex would then find a meaningful support at around 12,514 points. If this level too is broken, then there would a very critical support at 12,378 points. If the market closes below this level, it would trigger panic, leading to a sharp fall.
On its way up, the market is likely to test its first resistance at 13,308 points, which is only a moderate resistance. Following this level, there would be a crucial resistance level at 13,430 points. If the Sensex closes above this level, then sentiments would improve and gains would be more likely with a key resistance placed at 13,602 points. If the Sensex closes above this key level, then the sentiments in the short-term would turn positive, confirming more gains. The next key resistance after that would come up at 13,841 points, followed by a trend-confirming resistance at 14,073 points.
The S&P CNX Nifty, the National Stock Exchange’s main index, too is showing signs of weakness purely technically and is likely to test its first support at 3,894 points unless the US financial package is cleared.
If the Nifty closes below this level, then the next support level would come at 3,781 points. If the index breaks this and closes below this level, it would find its next support at 3,561 points.
On its way up, the first meaningful resistance for the Nifty is now placed at 4,038 points, and a close above this level would better the sentiments and would indicate some gains.
There is an immediate resistance after that at 4,079 points and a close above this would indicate more gains with the next key resistance coming up at 4,163 points. If the Nifty closes above this level, then there would be a trend-deciding resistance at 4,253 points and a close above this would indicate positive a trend in the short term with next resistance coming up at 4,342 points.
Among individual stocks, Axis Bank Ltd, Jaiprakash Associates Ltd and Tata Power Co. Ltd look good on charts. Axis Bank, at its last close of Rs705.15, has a target of Rs727 and a stop loss at Rs681. Jaiprakash Associates, at its last close of Rs120.90, has a target of Rs131 with a stop loss at 107. For Tata Power, which last closed at Rs988.95, the target is Rs1,022 and stop loss Rs956.
From last week’s recommendations, Sterlite Industries (India) Ltd touched a high of Rs518.80, which was well above its target of Rs490. Union Bank of India rose to Rs155, but missed its target of Rs159. However, Infosys Technologies Ltd flopped terribly and triggered its stop loss.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments,questions and reactions to this column are welcome at email@example.com
Also Read Vipul Verma’s earlier columns