From a high of 5,702 points to a low of 5,454 points, the benchmark S&P CNX Nifty index on the National Stock Exchange kept dancing to the tunes of the Reserve Bank of India (RBI), derivative expiry for July and the horrifying tales of the US debt crisis.
Though the guessing game has been on for several weeks, if not months, about the likely fallouts of US debt default, there has been a parallel stream of optimism running alongside. The markets, until Friday, hoped that the US would find a way out of the stalemate. However, the stalemate continued till the time of writing this column, though the urgency to resolve the crisis was clearly visible with serious efforts on by both democrats and republicans.
As long as this crisis looms large, the undertone on the bourses will worsen with every passing hour as there is going to be extreme caution among investors ahead of the 2 August deadline. However, its resolution in a Senate test vote scheduled at 5pm GMT on Sunday (10.30pm India time)—which is much before the Asian bourses open on Monday—could trigger a short rally on global bourses. So, much would depend on this Senate test vote, and till then there is not much point guessing the trend.
Coming back to Indian bourses, the dent caused by RBI’s harsher than expected stance, which included a 50 basis points (0.5%) hike in interest rates and a hawkish tone, shattered the morale of the bulls considerably. However, the markets will absorb this stance also and move on, but it may take longer than expected now.
Technically, the markets are once again showing signs of bottoming out in the short term. But I would like to see developments in the US before taking a call on technical signals.
In case the debt crisis is resolved, there is a relief rally on the cards for Indian bourses. However, the magnitude and momentum of the rally would depend on a lot of fundamental factors, including the HSBC Markit manufacturing PMI (purchasing managers index) for the month of July scheduled for release on Monday, monthly auto sales scheduled on Monday and monthly cement dispatches due later this week. These indicators are not expected to be positive, so any positive number will be greeted with elevated optimism on the bourses.
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Global indicators, including Chinese NBS (National Bureau of Statistics) PMI scheduled for Monday, US ADP employment data and ISM manufacturing PMI on Wednesday and non-farm payroll data on Friday will be watched closely for cues on major economies. The numbers will influence the trend on global bourses.
Back home, technically there is not much damage seen on the charts and despite a weak undertone, a bounce back and relief rally is on the cards. The Nifty, on its way up, has its first resistance at 5,522, which is a crucial resistance. If this resistance is breached by good volumes or if the Nifty closes above it, this will be the first positive signal as the stage will be set for further gains up to 5,573 points.
The Nifty is likely to encounter its next resistance between 5,573 and 5,581 points. This is a mild resistance band and, as long as the volume remains strong, it won’t disrupt the trend. The next resistance will come at the crucial 5,618 points. If the Nifty retraces from here, it may head for some correction. However, a close above this will mean the resumption of bullish sentiments. The next logical resistance will come at 5.651 and 5.737 points. On the downside, the first support is likely to come at 5,448, which is a moderate support level as a fall below this on strong volumes or a close below this will mean weak sentiment. The next support will come at 5,373, followed by a very strong support at 5,256 points.
Among individual stocks, DLF Ltd, Punjab National Bank and Tata Motors Ltd look good on the charts. DLF, at its last close of Rs 230.90, has a target of Rs 239, and a stop-loss of Rs 217. Punjab National Bank, at its last close of Rs 1,124.25, has a target of Rs 1,153, and a stop-loss of Rs 1,091. Tata Motors, at its last close of Rs948.10, has a target of Rs 972, and a stop-loss of Rs 918.
From my previous week’s recommendations, Larsen and Toubro Ltd met its target. Yes Bank Ltd and HDFC Ltd missed the target and hit the stop-loss in a knee-jerk reaction, but closed above their stop-loss levels and, thus, still remain a valid call.
Illustration by Shyamal Banerjee/Mint
Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at firstname.lastname@example.org