Momentum still with the market, but volumes need to increase

Momentum still with the market, but volumes need to increase
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First Published: Sun, May 31 2009. 10 32 PM IST

Updated: Sun, May 31 2009. 10 32 PM IST
Equity prices rose, ending higher for the 12th consecutive week, lifted by positive global and domestic data. On the domestic front, better-than-expected March quarter economic data boosted investors’ spirits and aided the rally. Market sentiment was also buoyed by some policy announcement by the new government, which reinforced investor confidence that government initiatives would accelerate the process of economic recovery.
For global markets, the biggest boost came from US consumer confidence data for May, which touched its highest level in eight months. A rise in crude oil prices on optimism over a global economic recovery also spurred the markets. However, rising yields on US government debt fuelled concern that businesses and consumers could face higher borrowing costs, which may impede an economic recovery. This week, all eyes will be on US Federal Reserve chairman Ben Bernanke when he addresses lawmakers in Congress on Wednesday. Investors will be looking for the Fed’s take on a recent surge in the supply of US government debt.
A rise in commodity prices, which led the recovery on Wall Street on Friday, may also turn out to be a concern because of its potential to stoke inflation. However, a bigger worry for the US economy this week would be the looming bankruptcy of General Motors Corp., although it wouldn’t come as a shock to the stock market when it happens, given that it has been in the works for several days. Investors would also be closely watching US non-farm payrolls data and readings on the manufacturing and services sectors.
Time to act: The Fed’s take on a recent surge in the supply of US government debt will set the market mood. Mannie Garcia / Bloomberg
Back home, investors will look out for India’s trade deficit for the month of April and ABN Amro’s May purchasing managers’ index, or PMI, for manufacturing for cues on the state of the economy. If these data confirm an economic recovery, it would provide a huge boost to the market.
Technically, the market is still showing signs of strength and is likely to post further gains at the beginning of the week. The breadth of the market still remains positive, with advancing volumes outpacing falling volumes by a huge margin. But technical studies have started signalling that the market may be overbought. Until last week, the market was not overbought because rising stock prices were backed by rising volumes. Though volumes continue to remain high and stock prices are still moving up, the beginning of a divergence in prices and volume has started giving a preliminary indication that the market has started tiring. However, it does not mean that this is the end of positive momentum. This simply means that the momentum would start to weaken in due course unless volumes once again start supporting prices.
In terms of the Bombay Stock Exchange’s (BSE) Sensex, the trend is currently up and the momentum is supporting more gains on Monday. On its way up, the Sensex is likely to test its first resistance at 14,729 points, which is a moderate resistance; there is an 85% probability that the Sensex would breach this level and move up. The next resistance is likely to come at 14,931 points, which would be a tough resistance level for a rising Sensex. However, the Sensex might cross this resistance also and may edge up to test its next, important resistance at 14,994 points, which would be tough to break. If this resistance is broken, there could be a short, sharp rally, which would push the Sensex to 15,230 points. There is final resistance at 15,512, which could cause the Sensex to reverse direction.
On the downside, the first meaningful support is at 14,369 points. If this support is breached, it would dent investor sentiment considerably. However, if the Sensex closes below this level on high volumes, it would signal a further decline, with support slipping to 14,185 points, followed by a strong support level at 14,010 points.
In the case of the S&P CNX Nifty, the first resistance is close at 4,475 points, which is most likely to be broken, with the next resistance expected in a band of 4,487-4,502 points. This is also a moderate resistance and if broken could lead to further gains, with the target for the Nifty shifting to 4,623 points, which is an important resistance level. If this level is breached, the next resistance levels would come at 4,745 and 4,839 points.
On the downside, there is minor support for the Nifty at 4,392 points, followed by another moderate support at 4,350 points. If this support level goes, there would be strong support at 4,267 points, which if broken would be bearish for the Nifty.
Among individual stocks, this week Reliance Communications Ltd, Jindal Steel and Power Ltd and Bank of Baroda look good on the charts. Reliance Communications, at its last close of Rs305.65, has a target of Rs318 and a stop-loss of Rs291. Jindal Steel and Power, at its last close of Rs2,090.40, has a target of Rs2,174 and a stop-loss of Rs2,024. Bank of Baroda, at its last close of Rs438.80, has a target of Rs452 and a stop-loss of Rs424.
From the previous week’s recommendations, Bajaj Hindustan Ltd touched a high of Rs146.95 and met its target of Rs141 easily. HDFC Bank Ltd touched a high of Rs1,459.60 last week, which was well above its target of Rs1,399. Jindal Saw Ltd touched a high of Rs388, which was well above its target of Rs377.
Vipul Verma is CEO, Moneyvistas.com. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Sun, May 31 2009. 10 32 PM IST