If tension does not escalate, market sentiment could stay positive

If tension does not escalate, market sentiment could stay positive
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First Published: Sun, Nov 30 2008. 11 06 PM IST

Updated: Sun, Nov 30 2008. 11 06 PM IST
When the stock markets reopened on Friday, after being shut the previous day because of the audacious terrorist attacks on Mumbai, investors were braced for a sell-off, judging from the precedent set in the immediate aftermath of the 9/11 attacks in the US. However, the markets held up and key indices posted gains.
Although the markets were highly volatile after the Mumbai attacks, partly because of the expiry of derivative contracts for November, bargain buying in frontline stocks and key indices closing above their previous week’s levels suggested positive sentiment. But any escalation of tension between India and Pakistan, because of the alleged Pakistani links of the terrorists, could mean trouble for the markets.
Terror-hit: A display screen on the Bombay Stock Exchange building on Friday. The markets were highly volatile after the Mumbai attacks, partly because of the expiry of derivative contracts for November. Bhuma Srivastava / Mint
On the economic front, better-than-expected second-quarter gross domestic product growth and declining inflation have eased concerns and globally there is an air of calm. If the calm prevails for some time and no more casualties of the financial crisis are reported this week, global market sentiment could turn positive.
Technically, there is a rally in the making, which has a potential of adding nearly 700-1,000 points to the Bombay Stock Exchange’s (BSE) benchmark index, the Sensex. Provided other factors such as India-Pakistan tensions don’t interfere, there is at least an 85% chance that the rally would begin soon.
On the way up, the Sensex is likely to test its first resistance at 9,189 points (current close: 9,092.72). A convincing crossover of this level on high volumes would mean the Sensex’s entry into a rally mode (probability 85%).
The next resistance level would come at 9,371 points. This would be a minor resistance level and would not prove a any significant stumbling block to the northward momentum.
However, the next resistance point, which is expected at 9,539, will be crucial. If the Sensex fails to cross this level convincingly, the rally would weaken. If the Sensex crosses this on high volumes, the rally would gather momentum, and the next resistance level would come at 9,682 points. This too would be a critical level and may threaten a rising Sensex if the volumes fail to match the momentum. Investors should watch this level closely because this could also be the terminating point of the rally in case the trend weakens.
Technically, if this level is crossed, the next resistance would be at 9,969 points. A comfortable close above this level would turn the market undertone distinctly bullish and mean more gains in coming days.
On its way down, the first support is likely to come at 8,831 points. This would be a moderate support level and may not offer enough ground to a falling Sensex.
However, the next support level at 8,861 points would be crucial as a close below this level would mean more declines, raising the chances of the Sensex testing new closing lows. If the Sensex bounces back comfortably from here, there would be a strong recovery, but a close below this level would push the next support to 8,319. This level should be monitored very closely—a close below this level would mean more declines, which might push the Sensex to its recent low of 7,697 points.
In terms of the S&P CNX Nifty, the index is in a rally mode now, suggesting strong gains on Monday with a caveat—other factors being constant, which include political and geopolitical factors such as India-Pakistan tensions.
The Nifty is likely to test its confirmatory resistance at 2,788 points, which would signal the beginning of a rally. If this resistance level is crossed (probability 85%), then there would be a Nifty rally. On its way up, the Nifty would test its next meaningful resistance at 2,887 points. This would be an important level as it would offer a rising Nifty tough resistance. However, if this level goes then the next resistance is placed immediately at 2,928 points, which would also be crucial in deciding the fate of the rally. If the trend weakens and momentum fizzles out around this level, then this could signal the end of the rally.
However, if this level is breached on good volumes and the Nifty closes comfortably above this level, then the sentiment would turn bullish, signalling more gains, with the next resistance coming at 3,068 and 3,155.
On its way down, the Nifty is likely to test its first support at 2,688 points, which is a moderate level. If the Nifty falls below this level on high volumes, investor sentiment would turn negative with the next, crucial support coming at 2,637 points. This would be an important level to watch. If the Nifty bounces back from here, then there would be a strong recovery, but a comfortable close below this would be negative with more declines in the offing.
The next support level would shift to 2,520 points. This level, too, would be crucial; a close bellow this would mean new lows in the coming sessions.
Among individual stocks this week, Axis Bank Ltd, DLF Ltd and Punj Lloyd Ltd look good on the charts. Axis Bank, at its last close of Rs408.50, has an immediate target of Rs424 followed by its next target at Rs438 and a stop-loss of Rs384. DLF, at its last close of Rs198.40, has a target of Rs214 and a stop-loss of Rs172. Punj Lloyd, at its last close of Rs137.05, has a target of Rs148 and a stop-loss of Rs124.
From the previous week’s recommendations, ACC Ltd touched a high of Rs414.90 but missed its target of Rs418 by a whisker. ACC continues to remain a recommendation with the target likely to be met this week.
Bank of Baroda touched a high of Rs272.50, missing its target of Rs284, and still remains a recommendation.
However, Siemens India Ltd touched a high of Rs299 and easily met its target of Rs288.
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, Nov 30 2008. 11 06 PM IST