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Political crisis may affect sentiment

Political crisis may affect sentiment
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First Published: Sun, Mar 06 2011. 10 53 PM IST
Updated: Sun, Mar 06 2011. 10 53 PM IST
Indian bourses witnessed a strong rally following the budget as investors lapped up beaten down stocks on hopes that foreign fund buying would resume as clarity emerged on the government’s course of action. Moreover, better-than-expected HSBC Markit manufacturing Purchasing Managers’ Index (PMI) for the month of February and firm trend on the global bourses bolstered sentiment despite a consistent rise in international crude prices due to tension in Libya and elsewhere in the Middle East. Consistently improving economic conditions in the US and signs of economic revival in Europe were well received by the global stock markets as the undertone remained strong on most global markets, despite moderate weekly losses on some European bourses. Asian bourses did better last week, with India topping the gainers with a rise of about 5%.
However, the political crisis on the weekend—key ruling United Progressive Alliance (UPA) partner Dravida Munnetra Kazhagam (DMK) deciding to pull out of the government—is likely to dent market sentiment as the pace of economic reforms may slow. The Indian stock markets, which were earlier rocked by a raft of corruption scandals against the ruling coalition, are going to take this development with a lot of caution as it could affect the ongoing budget session in Parliament. The DMK’s pullout is not going to affect the alliance at the Centre as it won’t lead to the government falling, but the government is likely to find it tougher to pass reform Bills, including the goods and services tax—a key piece of reform that will cut business costs and boost government revenue. Though the drama of Indian politics is yet to unfold, as there are many a slip between the cup and the lip, from the stock market’s perspective, it is a serious concern and the ripples caused by this uncertainty are going to be felt in days to come.
Coming back to the business, the markets are likely to test waters on Monday as rising crude oil prices, weakness on global bourses and lack of positive triggers and now, to top it all, the political crisis have set the stage for a weak opening on Indian bourses on Monday. The magnitude and momentum of the decline will depend largely on how the market perceives this political crisis, but technically the markets are tied in a range of 18,611-18,275 points for the Sensex and 5,577-5,471 for the Nifty. Purely technically, a breakout on either side would decide the trend for the week. On its way down, the Nifty is likely to test its first major support at 5,471.
Under normal circumstances, this level is likely to hold, but if this level goes with good volumes, then the trend would turn bearish, adding chances of a further fall in the Nifty. The next support for the falling Nifty would come at 5,411 points but this being a moderate support level may not withstand a fall led by substantial momentum and volumes.
However, just because this level is moderate in terms of strength, it cannot be ignored as this level is very crucial from the point of view of the overall trend. If the Nifty finds good support at this level and bounces back, then this recovery would be real, which may push it back to the upper end of the band mentioned earlier. However, if the Nifty falls from this level after breaking it with good volumes, then I think the selling pressure would intensify and it may push it to the next support level of 5,335, which is again a moderate support level.
However, in case this support also goes, then the market could fall to 5,240 points, which I think is a strong support and a likely base for the market. On its way up, the Nifty has a strong resistance at 5,577 points, which is also a trend decider level. If the Nifty closes above this level, or crosses this level with strong volumes, then the trend on the bourses will remain positive with the likelihood of more gains on bourses with the next meaningful resistance expected at around 5,617. This being a good technical resistance, it may see some profit selling and some correction also. However, if the momentum pushes the Nifty beyond this level, then the next resistance would come at 5,656 followed by a strong resistance at 5,754. On the basis of study of other key technical studies, I think that in case the markets fall in the initial part of week, then the Nifty should bounce back from 5,411 points.
Among individual stocks, this week, Reliance Capital Ltd, IFCI Ltd and ACC Ltd look good on the charts. Reliance Capital, at its last close of Rs484, has a target of Rs499 and a stop-loss of Rs457. IFCI, at its last close of Rs52.10, has a target of Rs55 and a stop-loss of Rs48.50, while ACC, at its last close of Rs987.25, has a target of Rs1,012 and a stop-loss of Rs963.
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, Mar 06 2011. 10 53 PM IST