Equities recovered most of their losses and ended a volatile week with gains on Friday. And the month of August finished on a positive note for the markets despite concerns over inflation and oil prices.
Gains during the month looked impressive as they came despite foreign funds selling more shares than they bought, though some shift in their investment pattern was noted in the last week.
As far as sentiments are concerned, a state of confusion and uncertainty dominated the market last week and may continue this week as well. This, to some extent, is because of mixed economic signals and largely due to the over reaction of analysts and investors. Be it the latest inflation numbers, which fell for the first time in several weeks to 12.40% after reaching a high of 12.63% in early August, or oil prices, the reaction of investors has always been out of proportion.
Given the fact that hurricane Gustav could disrupt oil production and refining operations in the US Gulf Coast, a temporary rise in oil prices can be expected despite the recent strength of dollar. But all of this is already well discounted in stock prices, and the threat posed by the hurricane is likely to pass in coming days.
So, why should any of this heighten inflation fears in India?
Going by the general perception, whenever there is a rise in oil prices, equities plunge on fears that inflation might accelerate, despite the fact that the retail price of oil in India is state-administered and is not directly linked to the international markets—so the jitters due to inflation worries from day-to-day movement of oil is an over reaction.
Confusing signal: A file photo of a man looking at a screen displaying stock prices on the Bombay Stock Exchange building in Mumbai. The market is likely to witness confusion and uncertainty this week. Photograph: Arko Datta/Reuters
Also, a week’s data of inflation showing a drop should be taken only as an indication and not a conclusion. It would need data over a much longer period to predict a trend.
Investors should watch out for inflation numbers in coming weeks and hold their nerve rather than getting into a frenzy based on a week’s figure.
More than inflation, the slowing of the economy is a bigger concern, and if this continues, it will likely be reflected in the coming quarters in the form of lower valuations. The growth rate of India’s gross domestic product at 7.9% in the first quarter of this fiscal year is the slowest since the third quarter of 2004-05.
Though, I am not perturbed much about the rate of economic expansion, if the slowdown continues for some more months, it will be a cause of concern.
Still, that’s about the medium-term to long-term outlook. In the short run, the market is likely to trade in a volatile fashion.
Technically, the market is in a consolidation phase and Friday’s rally has given it a positive momentum.
However, unless the main indices cross their key resistance levels with significantly higher rising volumes, this rally will not be translated into a trend. This clearly means that despite Friday’s big rally, there is still no clear trend on the bourses.
On its way up, the Bombay Stock Exchange’s benchmark Sensex Index is likely to come across its first resistance level at around 14,763 points . This is going to be a key level for the Sensex.
If the index closes above this, then there will be a short rally of around 300 points, following which there will be very crucial resistance level at 15,063 points. If the Sensex manages to close above this level, then the short-term trend will turn positive and the next resistance level will be 15,603 points.
On its way down, the Sensex might test its first support level at 14,296 points, which is a moderate support. A drop below this level with significantly higher falling volumes would mean weakness in the market, which might take the index down to its second support level of 13,988 points. This is an important support level and needs to be watched very carefully as a close below this would be bearish in nature and would mean further fall for the markets with the next support level coming up at 13,689 and 13,449 points.
For the S&P CNX Nifty, the main index of the National Stock Exchange, the first resistance on its way up is likely to come up at 4,390 points and the next one at 4,476 points. If the Nifty crosses this hurdle, the sentiments would turn bullish and the next resistance, a strong and crucial one, will be at 4,648 points.
On its way down, the Nifty will test its first support at 4,315, which is a moderate level. Following this level, there will be another moderate support at 4,269 points and a very crucial one at 4,195 points.
If the Nifty goes below 4,195 points, bears will take control and the sentiments would turn negative.
Among sectoral indices, the BSE Mid-Cap index is showing signs of recovery with a key resistance placed at 5,843 points. A close above this level would signal more gains with the crucial resistance level placed at 6,007 point.
A close above this level would mean a positive trend in the short term. The index will have supports at 5,594, 5,479 and 5,303 points.
The BSE Small-Cap index, which has closely followed the Mid-Cap Index last week, is still showing divergent trends and is likely to be range bound with an upward trigger at 7,091 points and a downward trigger at 6,560 points.
This week, among sectoral indices, the BSE Bankex and the BSE Metal are looking good technically, with chances of more gains.
Among individual stocks this week, Yes Bank Ltd, ACC Ltd and Sterlite Industries (India) Ltd look good on our charts. Yes Bank, at its last close of Rs134.20, has a target of Rs142 with a stop loss at Rs123.
For ACC, which closed last at 562.35, the target is Rs580 and stop loss Rs539. Sterlite Industries, at its last close of Rs627.70, has a target of Rs645 and stop loss of Rs597.
From our last week’s recommendations, Reliance Industries Ltd met its target of Rs2,287 on Monday itself.
However, ABB Ltd, which touched a high of Rs920, missed the target of 929 but is still a valid recommendation. Tata Steel Ltd 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 firstname.lastname@example.org