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Oil price decline offers a clear positive trigger

Oil price decline offers a clear positive trigger
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First Published: Mon, Aug 25 2008. 12 09 AM IST

Updated: Mon, Aug 25 2008. 12 09 AM IST
Key indices and stock prices were battered yet again last week due to poor sentiments and lack of any positive triggers.
Issues such as a surging inflation, slowing economy, persistent selling by foreign funds and a fresh spike in oil prices weighed on sentiments. However, markets now seem to have discounted some of these factors and are looking a bit tired as far as the downward momentum is concerned. A recovery on Friday in the evening session suggests markets are oversold in the short-run and, at least technically, some recovery is due this week.
Meanwhile, global cues are also supporting this technical view that this week should open on a positive note and initial days should hold gains for most investors. Fundamental global factors, such as a sharp drop in oil prices on Friday, down $6.59 (Rs286.8), or 5.4%, to $114.59 per barrel, could be the biggest relief and and a clear positive trigger for global bourses including India. It was the biggest decline in percentage terms since 27 December 2004 and it completely reversed Thursday’s oil gain of a similar size.
Meanwhile, some action is also expected on the bailout plan of US housing finance underwriters, Fannie Mae and Freddie Mac, which have seriously dented sentiment on US and global bourses.
If the US government comes out with an effective bailout plan, it will most likely give a boost to US markets, where positive sentiments have already started building up following US Federal Reserve chairman Ben Bernanke’s remarks on inflation, as well as hopes of some big merger after the Korea Development Bank said Lehman Brothers Holdings Inc. was a possible acquisition target. If US sees sustained gains during this week, it will have a positive impact on India too.
Back home, markets are now poised to recover and this week is going to be important due to the expiry of derivative contracts for the month of August.
High expectations: Fannie Mae’s building in Washington, DC. A bailout plan for mortgage finance companies Fannie Mae and Freddie Mac could give a boost to market sentiments globally. Photograph: Manuel Balce Ceneta / AP
The rollover of positions to the next cycle is moderate so far but is likely to pick up momentum later. However, in the absence of foreign fund buying, markets may not post big gains. But, if foreign funds turn buyers, then there could be a rally on bourses as well.
Technically, on its way up, the Bombay Stock Exchange’s benchmark Sensex index is likely to come across its first resistance level at 14,459 points, which is a minor resistance.
On crossing this resistance, the rising Sensex would face a strong resistance at 14,761 points. If the index crosses this resistance as well, then the sentiments in the market would turn bullish in the short term.
The key to the Sensex crossing this resistance would be volumes. If the market observes significantly higher, rising volumes, then the chances of crossing of this resistance level would brighten.
After this hurdle, the next resistance level for the Sensex would come up at 15,021 points. This, being a deciding resistance, should be watched very carefully. A close above this level would mean a short-term rally, which might take the Sensex to 15,575 points.
However, in the event of the Sensex falling from its current level, the chances of which seem quite low, the index would test its first support at 14,133 points, followed by an immediate support level at 14,030 points. However a close below this level would trigger more selling and sentiments would turn bearish in the short run, with next support for a falling Sensex coming at 13,782 points, followed by a strong support at 13,467 points.
In the case of S&P CNX Nifty, the National Stock Exchange’s main index, the immediate resistance level is placed at 4,379 points (last close: 4327.45 points), which, being a minor resistance, may be crossed easily. However it would signal bullish signal, indicating more gains ahead. The next resistance will come at 4,434 and 4,499 points. If these levels, which are of moderate type, are crossed, then the most critical resistance will come up at 4,652 points, which if crossed will be very bullish for short term as well as for medium term.
Among sectoral indices, the BSE Mid-Cap index is pointing to some gains as the index closed last week above its critical support level of 5,641. Now the index is likely to face a resistance at 5,846 points, following which the next resistance is likely to come up at 6,012 points. On crossing these, the index might witness a short rally, which would take it to 6,323 points. The BSE Small-Cap index is showing divergent trend. A close above 7,091 points would be considered bullish, while a close below 6,748 would be considered bearish.
Among individual stocks, this week, Reliance Industries Ltd, ABB Ltd and Tata Steel Ltd look good on charts. Reliance Industries, at its last close of Rs2,244.80 a share, has a target of Rs2,287 and a stop loss at Rs2,190. ABB, at its last close of Rs899.65 a share, has a target of Rs929 and stop loss at Rs867. Tata Steel, at its last close of Rs593.75 a share, has a target of Rs618 and stop loss at Rs571.
From our last week’s recommendations, Ansal Properties and Infrastructure Ltd touched a high of Rs109.75 a share, slightly above its target of Rs109.50, while Satyam Computer Services Ltd, recommended at Rs412.95 a share, met its target of Rs426. Grasim Industries Ltd triggered its stop loss and ended the week with losses.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments and questions are welcome at ticker@livemint.com
To read all of Vipul Verma’s earlier columns, go to www.livemint.com/aheadoftheticker
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First Published: Mon, Aug 25 2008. 12 09 AM IST