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Market rally to hold on fresh fund buying

Market rally to hold on fresh fund buying
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First Published: Sun, Feb 01 2009. 10 06 PM IST

Updated: Sun, Feb 01 2009. 10 06 PM IST
Last week’s stock market gains have reinforced my conviction that there is a rally in the making, a theme on which this column dwelt two weeks ago. A decline in stock prices the following week had made me revisit the research that went into making that prediction. Last week’s rise, paced by fresh fund buying, showed that the analysis still holds good. More importantly, the momentum should be maintained this week as well, although it may not be one way all through.
The US Senate will begin a closely watched debate this week on the $887 billion (Rs4.35 trillion) economic stimulus bill, after the House of Representatives passed it without a single Republican vote. If the plan goes through, there would be a rally across the globe; any hiccups or delays could test the patience of investors, who are literally on tenterhooks over the outcome. Any disappointment on this count could seriously hurt market sentiment.
Gains are expected over the week despite a likely dismal start on Monday after US and European markets declined on Friday. Although companies are nearing the end of the season for reporting their quarterly financial results and no major policy announcement is expected, the market undertone is likely to stay positive. This view is shared by technical analysis. Key technical studies have already started sending bullish signals. If the market gains from present levels on rising volumes, a rally would be confirmed, with the Sensex on the Bombay Stock Exchange (BSE) facing its first major target of 10,176 points (probability: 85%). This will not be the termination point of the rally, but would be an important resistance level for the Sensex. However, prior to that, the Sensex would test resistance at 9,567 points, which would be a moderate resistance level, followed by an important resistance level of 9,804 points. If this resistance is broken (probability: 90%), then there would be a short, sharp rally heading to its next resistance level of 10,176 points mentioned above. This level would attract good profit selling and may see some consolidation. However, if the Sensex braves this resistance level on good volumes and closes above it, it would be an indication of a continuation of the rally, which could extend till up to 10,458 points.
On its way down, the Sensex is likely to test its first support at 9,096 points, which will be an important level to watch as a confirmed breach of this level would seriously dent sentiment. Readers may note that from the current close of 9,424, this level is quite far and unless there is a significant shift in sentiment, it will not be breached. However, a confirmatory close below this level would mean a further decline, with the next prominent support level shifting to 8,948 points.
This would be another prominent support level and may offer enough ground for the falling Sensex. Going by the current sentiment, the Sensex should find strong support at this level and bounce back. There are little chances of the Sensex breaking this level. However, if it transpires, this would be a bad signal for the stock market and lead to more declines. There would be rock-solid support for a falling Sensex at 8,646 points.
For the S&P CNX Nifty, the trend looks positive despite the fall on US and European bourses on Friday. Technically, the impact of global markets would be shortlived. On its way up, the Nifty would come across its first resistance at 2,906 points. This would be a moderate resistance level and would not pose any threat to the positive momentum; the Nifty would cross this level without much of a problem.
The next key resistance level would come up at 2,996 points, which is an important resistance level but will not pose a threat to the rising Nifty. The next and most critical resistance level would come at 3,058 points. This level would attract some profit selling and consolidation. However, if this level is breached on good volumes, then there would be sharp gains in the Nifty, leading it to its next resistance level of 3,140 points.
On its way down, the Nifty is likely to come across its first support at 2,783 points. It would be an important support level to watch as a confirmatory close below this level would be bearish, with the next support coming up at 2,728 points. This would be a moderate support level and may not offer strong support to a falling Nifty. If this level goes, then the next support level would come at 2,664 points, which should offer strong support to a falling Nifty.
Among individual stocks, this week Axis Bank Ltd, Lanco Infra Ltd and Suzlon Energy Ltd look good on the charts. Axis Bank, at its last close of Rs433.70, has a target of Rs449 and a stop-loss of Rs411. Lanco Infra, at its last close of Rs114, has a target of Rs123 and a stop-loss of Rs103, while Suzlon Energy Ltd, at its last close of Rs47.25, has a target of Rs52 and a stop-loss of Rs41.
From last week’s recommendations, Tata Tea Ltd touched a high of Rs633.50 and comfortably met its target of Rs632. Reliance Industries Ltd was the blockbuster, gaining 15% over the week and overshooting its target by a wide margin. Union Bank of India touched a high of Rs149.80 but missed its target of Rs155 and is still a valid recommendation this week.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Sun, Feb 01 2009. 10 06 PM IST