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Consolidation to follow a rebound

Consolidation to follow a rebound
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First Published: Sun, Jan 30 2011. 09 14 PM IST
Updated: Sun, Jan 30 2011. 09 14 PM IST
Indian bourses continued their downward trend last week, with heavy selling by funds and traders. The fall was led by real estate, infrastructure, banking and financial services stocks; investors dumped them fearing a further fall.
Inflation continued to haunt investors. Weekly food inflation went up, raising concerns about its overall impact. The highlight of the week was the Reserve Bank of India’s (RBI) periodic policy review, which was on expected lines. But the hawkish undertone of the policy triggered fears of further tightening in due course.
Globally, the undertone remained firm, with positive economic indicators released in the US strengthening sentiment. US economic data scored very well on housing, consumer spending and quarterly gross domestic product (GDP).
The underlying sentiments in even the troubled euro zone remained upbeat. It was encouraging to see Spanish, Italian and Greek share prices recover in January, after a dismal 2010 on concerns over sovereign debt.
Fresh trouble in Egypt, however, played the global spoilsport, leading to a sharp fall on US and European bourses on Friday. As an outcome of the unrest in Egypt, crude prices shot up around 4% on Friday, fanning fears of a further rise in inflation if the crisis gathers momentum around the Arab world.
The crisis is likely to weigh upon Asian bourses on Monday, as the impact of the spurt in oil prices and losses on US and European bourses get reflected. This would mean a lower opening for India as well, as underlying sentiments are already very weak.
The sharp fall on Friday followed by some rebound was a good indication for Indian markets. Under normal circumstances, it could have been a sign of strength returning to Indian bourses. However, since global sentiments have soured over the weekend, the weakness would get extended initially on Indian bourses as well.
Given that markets are now moving in oversold zone, the downward potential is getting limited. This could be an opportunity for long term investors to take a call on their portfolios. Since the Budget is just a month away, I do not think prudent long term investors—including funds—would move to heavily trimmed positions as the country’s economic credentials remain stout.
For this week, I am expecting some rebound followed by consolidation. Economically, this is an important week as it comes loaded with important data. On 31 January, infrastructure output data, which is likely to throw light on its growth, would be released. On Tuesday, the HSBC manufacturing PMI data, which has become an important benchmark, would be released. It will be followed by monthly auto sales figures and cement dispatches. So there is a lot of data to churn on Monday and Tuesday, which might provide the market a much needed trigger.
Globally, the Chinese PMI data would be under the scanner, and no one wants it to be good. Good data would make the case for monetary tightening stronger, while muted data might also keep monetary tightening muted for a while. There are fears that China might use the lunar new year holiday as a cooling down period for increasing interest rates. If it happens, there could be fresh trouble on global bourses. In the US, the week would remain busy due to crucial economic indicators. The most important ones would be ADP jobs data on Wednesday, weekly jobless claims data on Thursday and non-farm payroll data on Friday.
Back home, technically the markets are not out of woods as the indicators are still pointing down, despite testing oversold levels. Going forward, the Nifty index on the National Stock Exchange is likely to test its first support at 5,456 points, which is a moderate support. However, if this support level is breached, the next support level will come at 5,391, which is likely to be a strong support level. If that level goes, the bottom is likely to come at 5,248 points.
On the upside, the Nifty is likely to see its first resistance coming at 5,564 points, a moderate resistance level. The next resistance would come at 5,634 points, which will again be a moderate resistance level. But 5,681-5,702 points would be the real test for the Nifty as a close above this would only mean the return of positive sentiment.
Among individual stocks, ONGC Ltd, Sesa Goa Ltd and Tata Consultancy Services Ltd (TCS) look good on charts this week.
ONGC, at its last close of Rs1,132.90, has a target of Rs1,154 and a stop loss of Rs1,103; Sesa Goa, at its last close of Rs329.40, has a target of Rs339 and a stop loss of Rs317; while TCS, at its last close of Rs1,181.35, has a target of Rs1,204 and a stop loss of Rs1,156.
Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Sun, Jan 30 2011. 09 14 PM IST