Derivatives expiry adds volatility; US bank ‘stress test’ results awaited

Derivatives expiry adds volatility; US bank ‘stress test’ results awaited
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First Published: Mon, Apr 27 2009. 12 45 AM IST

Updated: Mon, Apr 27 2009. 12 45 AM IST
Equities and key indices gained for the seventh week in a row on persistent buying by funds and traders. This was despite economic uncertainties on global bourses, nervousness ahead of key earnings and political uncertainties amid probabilities of a hung Parliament after the general election.
The highlight of the last week was India’s performance vis-à-vis global bourses. India’s performance was among the best and was next only to Malaysia, while key markets such as Hong Kong, Singapore, China and Japan posted negative returns. Bourses in the US also fell during the week amid volatility. Fundamentally, the Reserve Bank of India’s credit policy review and its decision to cut interest rates was a positive trigger, but it had a limited impact as much of it was on expected lines and already discounted.
Going forward, the markets are looking strong once again and key indices look all set to scale new recent highs. This is primarily due to strong liquidity on the bourses because of foreign fund buying.
Moreover, falling interest rates and good corporate earnings are also helping the northward momentum. Though this week, the expiry of derivative contracts would add volatility on bourses but, I think, it will help the rising Sensex, as short covering would accelerate the gains.
Upward momentum: The Bombay Stock Exchange building. Key indices and a number of stocks are on a firm footing and a study of critical technical indicators hints at handsome gains in the early part of this week. Madhu Kapparath / Mint
However, there could be some caution on global bourses ahead of the impending release of bank “stress test” results in the US, a Federal Reserve meeting and a number of earnings in the US. Though last week’s earnings were good and these numbers fared better than expectations, given the state of US economy, the economic data and earnings are being viewed with lot of suspicion.
Besides the earnings, critical economic data such as readings on February home prices, April consumer confidence, weekly jobless claims and an advance report on first quarter real gross domestic product would also weigh on global sentiments and any positive indication stemming out of them would boost sentiments immensely, while negative numbers could trigger profit selling. Moreover, the Federal Reserve will be in the spotlight early this week as the central bank’s policy-making panel is set to hold a two-day meet beginning Tuesday.
Most importantly, the Obama administration is due to release the bank stress test results on 4 May. But there are fears that some of the news could start trickling out next week, which raises the spectre of more volatility in the stock markets. So, despite strong gains on Friday, the US markets may not be able to chart the path of strong gains as caution rather than conviction would rule the US bourses. However, in India the situation is better as a combination of momentum, conviction and optimism would drive the markets higher.
Technically also, the key indices and a number of stocks are on a firm footing and a study of critical technical indicators hints at handsome gains in the early part of this week. In terms of the Bombay Stock Exchange’s Sensex, the upward momentum is likely to pick up and the benchmark on its way up would come across its first resistance at 11,502 points, which is a moderate but important resistance level. If this resistance is breached with good volumes, then the sentiments would improve and the northward trend would strengthen on the bourses as the Sensex would then aim at 11,684 points. This is a strong resistance level and would see some profit selling, but it might not be strong enough to upset the trend. If this resistance also goes then the next resistance would come at 11,836 points, which will also be strong resistance level and it might upset the trend if volumes start dwindling around this level.
But if volumes continue to remain high, then the chances of this rally reaching its final resistance level of 11,984 points—which would also be the termination point of this rally—will become very bright and the Sensex may rush to touch this level. The probability of the Sensex breaching its first and second resistance is 90%, while the chances of breaching its resistance at 11,836 points are 80%.
On the flip side, the Sensex would test its first support at 11,188 points, followed by the next support level at 11,049 points and a very solid support at 10,878 points.
In terms of the Nifty, the first resistance is expected at 3,544 points, which is a moderate resistance only. The next resistance is expected at 3,592 points, followed by a strong resistance level at 3,631 points. However, if this resistance is crossed, then the next resistance and the termination point of this rally would come at 3,688 points.
On its way down, the Nifty would test its first support level at 3,437 points, which is likely to be a strong support. If it goes, then the next support would come at 3,385 points. However, there would be trend-deciding support at 3,304 points, as any fall below this point would mean an end of bullish sentiments.
Among individual stocks Tata Tea Ltd, Federal Bank Ltd and Oil and Natural Gas Corp. Ltd (ONGC) look good on charts. Tata Tea at its last close of Rs694.60 has a target at Rs709 and a stop-loss of Rs680. Federal Bank at its last close of Rs178.05 has a target of Rs188 and a stop-loss of Rs172, while ONGC at its last close of Rs856.65 has a target of Rs885 and a stop-loss of Rs835.
From the previous week’s recommendations, HDFC Bank Ltd touched a high of Rs1,123 and met its target of Rs1,096. Lanco Infratech Ltd gained 16.37% during the week and met its target easily. Bharat Heavy Electricals Ltd (Bhel) touched a high of Rs1,684.9 but missed its target of Rs1,696 by a whisker. Bhel continues to be a recommendation this week.
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: Mon, Apr 27 2009. 12 45 AM IST