The guessing game finally reaches its climax on Monday, when finance minister Pranab Mukherjee unveils the 2009-10 budget. Financial market participants and economists have been debating what the budget will deliver since the Congress-led United Progressive Alliance returned to power in May.
Some investors are betting that the budget would herald a new generation of economic reforms. The big question: Will the government be able to deliver what the economy needs and what the stock market wants? The answer will be available only on Monday; it is hoped the government would fulfil some major demands of the economy and that should satisfy the stock market.
Purely technically, my studies suggest that there could be a big rally after the budget that will span over weeks, although prior to that an immediate knee-jerk reaction might also be seen. If I keep aside the uncertainties hovering around the budget and consider technical parameters only, then there are 80% chances of a post-budget rally. All long-term technical indicators are now turning positive and support my view. However, since the market has a tendency of overreacting to budgetary proposals, there would be a lot of volatility initially. Eventually the market should mirror the strength reflected by technical indicators.
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Besides technical parameters, global cues are equally important and merit consideration as they play a dominant role in day-to-day market movements. Globally, markets are passing through an uncertain phase and are not showing any clear trends. The latest US non-farm payroll data suggests that signs of an economic recovery are still hazy and there could be testing time ahead.
Since the earnings season is about to begin and quarterly corporate results would start pouring in, there would be caution among investors globally. These numbers would decide the trend on the global bourses. This week, some big earnings releases by companies such as Alcoa Inc., the biggest US aluminium maker, and Chevron Corp., the second biggest US oil refiner, would be watched very closely. More than the earnings, the market would be interested in projections and revenue guidance for the coming quarters and for the whole year.
Apart from this, a large US treasury auction could also buoy the market if it shows good demand for government debt. Concern that the appetite for debt is waning as the US government tries to fund its stimulus efforts was soothed by solid demand in last week’s record $104 billion (around Rs5 trillion) auction of treasury securities.
Among the key economic data, reports on the service sector in June from the Institute for Supply Management would be watched closely on Monday. Apart from it, the regular weekly initial jobless claims data will get more attention than usual after Thursday’s non-farm payrolls fell much more than expected.
Back home, on the economic front, the budget would be the key focus for the week. Later in the week, industrial output data and manufacturing data for May would be watched very closely to gauge the economy’s overall performance.
In terms of support and resistance levels for key indices, the Bombay Stock Exchange’s benchmark index, the Sensex, has important resistance at 15,010 points, which would be crucial in deciding the trend. If this level is breached on good volume, it may trigger more gains. The next resistance for the Sensex would come at 15,249 points, which would be a moderate resistance level and may not pose a serious threat to the rising Sensex.
Following this level, the Sensex would be poised for its next important resistance at 15,595 points. This would be again an important resistance level and a break-out above this level would mean more gains and the beginning of the next leg of a rally, which would take the index close to 16,676 points. However, before that there would be intermittent resistance levels at 15,796, 16,016 and 16,455 points.
On its way down, the first support is expected at 14,755 points, which would be a moderate support level and which could go easily. The next support would come at 14,362 points, followed by critical support at 14,031 points. A close below this level would mean the end of bullish sentiment and spell more declines.
For the S&P CNX Nifty, there is moderate resistance at 4,440, which if broken would signal more gains. There is trend-deciding resistance at 4,667 points, which if broken would signal the beginning of the second leg of the rally, which would take the Nifty beyond 5,000.
On the downside, there would be important support at 4,335 points, followed by critical support at 4,249. If the Nifty falls below this level, it would test its strength at 4,142 points, which if broken would signal more declines that may take the Nifty down to as low as 3,550 points.
Among individual stocks, this week, Kotak Mahindra Bank Ltd, Hindustan Zinc Ltd and Jaiprakash Associates Ltd look good on the charts. Kotak Mahindra, at its last close of Rs647.45, has a target of Rs664 and a stop-loss of Rs622. Hindustan Zinc, at its last close of Rs602.75, has a target of Rs633 and a stop-loss of Rs578. Jaiprakash Associates, at its last close of Rs214.55, has a target of Rs233 and a stop-loss of Rs199.
From our previous week’s recommendations, Everest Kanto Cylinder Ltd touched a high of Rs210.95, but missed its target of Rs219. Reliance Infrastructure Ltd touched a high of Rs1,299.80 and easily met its target of Rs1,289. Bhushan Steel Ltd, recommended at Rs673, touched a high of Rs720, which was well above its target of Rs693.
Vipul Verma is CEO, Moneyvistas.com. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org