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Keep a watch on the dollar index

Keep a watch on the dollar index
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First Published: Sun, Jul 10 2011. 10 13 PM IST
Updated: Sun, Jul 10 2011. 10 13 PM IST
Equity markets rose further last week on fresh foreign fund buying and selective buying by traders. Although the momentum lacked conviction, firmness on global bourses and strong foreign fund inflows kept the trend positive on Indian stock exchanges. The week was a mixed bag for the US. Private sector employment report reflected optimism about the economy, but Friday’s non-farm payroll data was below even the most pessimistic estimate and dampened sentiments.
The labour department report showed US employers hired just 18,000 workers, the fewest in nine months and far below economists’ expectations of a 90,000 rise. The unemployment rate rose to 9.2%, the highest since December, from 9.1% in May. It was the second consecutive month of weakness in this important economic indicator, and dented optimism. Another weak link in global economic indicators was the surprise rate hike by the Chinese central bank, underlining inflation concerns.
The market outlook remains cautious ahead of the earnings season. Hopes are low and earnings estimates for the second quarter have been revised lower for S&P 500 companies in the US. So the markets may remain under pressure initially. But if the results beat expectations in large numbers, it could trigger a broad-based rally on US bourses, which would boost stocks in other countries as well.
The earnings season officially starts in the US on Monday, while in India the season will kick off on Tuesday with Infosys Ltd’s quarterly numbers. Tata Consultancy Services Ltd will announce its earnings on 14 July and Wipro Ltd on 20 July. Though expectations are high from information technology (IT) firms, actual earnings and revenue guidance for subsequent quarters will guide the trend on bourses. Disappointing earnings will be negative for bourses.
This week will also see some key Indian economic indicators. Manufacturing and industrial output data for May will be released on Tuesday. The monthly Wholesale Price Index (WPI) for June will be released on 14 July and will be watched closely. India’s industrial output rose an estimated 8.2% in May from a year ago on a favourable statistical base effect and strong exports and infrastructure growth.
The US Federal Reserve will release the minutes of its 21-22 June policy meeting this week. Key economic indicators scheduled for release in the US are June retail sales, June inflation readings from the US Producer Price Index and the US Consumer Price Index, industrial production and capacity utilization for June, and the preliminary July reading on consumer sentiment.
In China, the June Producer Price Index, Consumer Price Index, industrial output data, retail sales, second quarter gross domestic product (GDP) numbers will be watched closely for cues on 15 July. China released the trade data on Sunday, which showed import growth fell to its slowest pace in 20 months in June, reflecting the impact of monetary tightening on the Chinese economy. The drop in June import growth, which decelerated to a 19.3% annual pace from May’s 28.4%, will be reflected adversely on Asian bourses on Monday.
Indian bourses are also likely to open lower on Monday, reflecting the global trend. The fall will be limited ahead of big ticket earnings announcement, beginning Tuesday. On its way down, the benchmark Nifty on the National Stock Exchange is likely to test its first support at 5,638 points, which is a minor support. If this support goes, as is likely, sentiments will turn weak. The next major support is likely to come at 5,602. A fall will be bearish and markets may see some knee-jerk reaction if volumes pick up. The next support is at 5,548, which is a moderate support followed by a good one at 5,491. The Nifty is likely to get strong support here.
On its way up, the first meaningful resistance is expected at 5,691, followed by a major resistance at 5,748. If this level goes, the uptrend will be restored as the Nifty will target 5,891, the key resistance level. But before this level, there will be another hurdle for the Nifty at 5,814.
Investors should also keep a watch on the dollar index. My technical analysis suggests a big rally in the making in the index. The index has a major resistance at 76; if this level is breached, it has a potential to touch 78 in the immediate term, which could be a threat for equity markets, including India.
Among individual stocks, Indian Bank, Oil and Natural Gas Corp. Ltd (ONGC) and Jet Airways (India) Ltd look good on the charts. Indian Bank at its last close of Rs 216.10 has a target of Rs 223 and a stop-loss of Rs 205; ONGC at its last close of Rs 276.20 has a target of Rs 284 and a stop-loss of Rs 264, while Jet Airways at its last close of Rs 481.15 has a target of Rs 490 and a stop-loss of Rs 467. From my previous week’s recommendations, Havell’s India Ltd, Bank of India and Alstom Projects India Ltd, all met their targets.
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, Jul 10 2011. 10 13 PM IST