Caution ahead of Union Budget; markets may look to global cues

Caution ahead of Union Budget; markets may look to global cues
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First Published: Sun, Jun 21 2009. 09 45 PM IST

Updated: Sun, Jun 21 2009. 09 45 PM IST
Ending 14 consecutive weeks of gains, key indices slipped on profit selling by funds and traders last week. I had mentioned in my previous column that the markets had started showing signs of fatigue and a correction was on the cards. The main index dropped 4.7% on the week, after rallying 83% over the previous 14 weeks— its best run in four years. The decline was moderate and well within the limits of a technical correction; fresh buying at lower levels shows there is appetite for quality stocks.
A similar trend was witnessed in key global markets as well and, except China, all the major bourses ended with losses. In the US, the Dow fell 3%, the S&P lost 2.6%, and the Nasdaq dropped 1.7% for the week. That was despite the emergence of encouraging data. Data ranging from production/manufacturing and jobless claims to inflation measured by consumer and wholesale prices sent out a message that the US economy is on the track to recovery. The data also put to rest growing fears of inflationary pressures and chances of an untimely increase in interest rates by the US Federal Reserve, or Fed.
Bond yields also eased, giving much-needed comfort to stock markets. The only concern last week was a pullback in commodity prices, which confused investors a bit. In a broader perspective, the minor pullback in commodity prices is not a bad sign for stock markets.
This week is again going to be important in the US from an economic data point of view. Investors will assess data on new and existing home sales that could point to whether the battered housing sector has bottomed out. This is a very significant indicator and any positive surprises could actually give a boost to US markets, which in turn would lift the global bourses as well. Since the second quarter is drawing to a close, investors would also keep an eye out for profit forecasts or warnings, although lower second-quarter earnings compared with the year-ago period are broadly discounted.
Investors would place their bets on third-quarter earnings and forecasts. Most importantly, the Fed is widely expected to leave interest rates unchanged after its two-day meeting ends on Wednesday.
Still, investors will closely check its statement for clues to the central bank’s economic outlook. Any positive indications from the Fed would boost the markets. Investors would be most interested in indications about the Fed’s approach towards interest rates and how long it can hold rates steady.
Back home, there are no major economic indicators due to be released other than the weekly inflation number and foreign exchange reserves data. However, since the Union Budget is drawing nearer, there would be some nervousness among investors. The positive aspects of the Budget have already been discounted and caution ahead of the Budget would restrict any gains. I am not expecting any big fall either, as there is enough buying interest that would bring bargain hunters to the fore at every sharp decline. In a nutshell, fundamentally, the markets are likely to consolidate with an eye on global cues.
Market booster: The Federal Reserve headquarters in New York. Investors will be keenly interested in indications about the Fed’s approach towards interest rates and how long it can hold rates steady. Daniel Acker / Bloomberg
Technically, the markets are likely to start the week on a cautiously positive note and may edge up initially. In terms of the Bombay Stock Exchange (BSE) Sensex, the gains are likely to extend to as much as 14,728 points, which is a meaningful resistance level.
I have not used the term “strong” but the term “meaningful” instead, because this resistance level is derived from a prominent technical study, whose interpretation suggests that following this level, the Sensex would need fresh triggers to maintain a positive bias and if those triggers are absent, it may lead to profit selling.
A meaningful breach of this level would mean more gains, as the Sensex would then aim for 14,996-15,010 levels. I think that the markets should find adequate resistance here and may even consolidate. However, a close above this level would see the Sensex moving to 15,127, followed by very strong resistance at 15,312 points.
On its way down, the Sensex is likely to get its first support at 14,182 points, which is a strong level. However, any close below this level should be considered a sign of weakness, with further declines in sight. The next important support will come at 14,040 points, which needs to be monitored closely because a fall below this point would mean bearish sentiment for some time to come. The next critical support would come at 13,565 points.
For the S&P CNX Nifty, resistance is expected at 4,395 points, which is a critical level. If the Nifty crosses this level, the next resistance would come at 4,430 points, followed by strong resistance at 4,520. On its way down, the Nifty would test its first support at 4,253 points, followed by 4,207. It has strong support at 4,095 points.
Among individual stocks, Housing Development Finance Corp. Ltd, or HDFC, Dr Reddy’s Laboratories Ltd and Tata Consultancy Services Ltd, or TCS, look good on the charts. HDFC, at its last close of Rs2,294.70, has a target of Rs2,340 and a stop-loss of Rs2,258. Dr Reddy’s, at its last close of Rs734.70, has a target of Rs756 and a stop-loss of Rs712. TCS, at its last close of Rs379.80, has a target of Rs394 and a stop-loss of Rs354.
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, Jun 21 2009. 09 45 PM IST