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Market outlook choppy as RBI set to unveil policy

Market outlook choppy as RBI set to unveil policy
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First Published: Sun, Jan 25 2009. 11 14 PM IST

Updated: Sun, Jan 25 2009. 11 14 PM IST
Oops! I went awfully wrong in my last column. Contrary to my expectations of a stock market recovery, share prices fell consistently during the last week and key indices ended in the red, as gloom prevailed on the markets.
The benchmark key index of the Bombay Stock Exchange (BSE), the Sensex, fell about 6.96% over the previous week, while the S&P CNX Nifty dropped 5.3%.
Fears of a deepening of the recession in the US and continued flow of negative economic data kept sentiment depressed globally and even last week’s mega event—the inauguration of US President Barack Obama—failed to cheer the markets.
Gloom deepened after Royal Bank of Scotland Group Plc. forecast the biggest loss ever reported by an entity in the UK, and US companies posted poor financial results.
Back home, the situation was no better as last week’s corporate results contained no surprises and a rise in wholesale price inflation to 5.6% in the week to 10 January, from the previous week’s 5.24%— well above a forecast of 5.05%—also dented sentiment.
Inflation rose as a truckers’ strike pushed up the prices of basic commodities.
Dipping indices: A file photo of the Bombay Stock Exchange building. Contrary to expectations, share prices fell consistently during the last week and key indices ended in the red as gloom prevailed in the market. Ashesh Shah / Mint
Still, given that inflationary pressures are easing, the Reserve Bank of India, or RBI, is seen to have the room to cut policy rates further, according to some economists.
But RBI, in its review of monetary policy on Tuesday, may hold rates steady. A cut in interest rates could be somewhere down the line, which would be key for reviving demand in the economy.
Technically, the markets are in a downward consolidation zone, but may edge up initially. Global factors are not supporting strength currently but technically, frontline indices are showing signs of a pullback.
In terms of the Sensex, the index on its way up would come across its first resistance at 8,881 points, which would be an important level. If the Sensex closes above this level, this would mean a breakout on the upside, which would trigger more gains.
The next resistance for a rising Sensex would come at 9,145 points, which would be a moderate level and may not offer enough resistance to the rising Sensex. If the Sensex closes above this level on good trading volumes, there would be further gains with the next resistance shifting to 9,287 points. This level might attract some profit selling, but it may not be detrimental to the upward momentum. If this level also is skirted on higher, rising volumes, there would be very strong resistance at 9,409 points. This level would be a decisive level for the Sensex, as a comfortable close above this would mean a significant rally.
On its way down, the Sensex would find its first support at 8,633 points, which is a moderate but important level. A close below this level would be an indication of a further decline as the support level would then shift to a band of 8,430-8,378 points.
Since this band is very critical, investors need to exercise caution. The importance of this band lies in the fact that if the Sensex rebounds from here or witnesses a sharp recovery following a knee-jerk reaction, this could well be the indication of a turnaround on the bourses and there could be further gains in the coming sessions.
But if the Sensex closes comfortably below this level on higher, rising volumes, this would be a convincing indication of stock market weakness with the next important support shifting to 7,713 points.
The S&P CNX Nifty, some gains are expected initially and on its way up, the Nifty would test its first resistance at 2,730 points.
This level would be a very important level for a rising Nifty, as a close above this level would trigger further gains with a probability of 85%.
The gains may not come in the form of a rally and would continue to be gradual, with the next resistance coming at 2,789 points. This level would be moderate but important. If this level attracts profit selling, there could be some decline in the Nifty.
A close above this level would mean caution giving way to confidence as the sentiment would start turning positive. These levels would not be confirming a trend.
However, if the Nifty edges up further, it would come across its next resistance level at 2,829 points, followed by critical resistance at 2,867. If the Nifty closes above this level, it would confirm a turnaround on the markets, with more gains accruing in the coming sessions.
On its way down, the Nifty would test its first and important support level at 2,661 points, which is quite close to the current closing of 2,678 points.
A fall below this level accompanied by high volumes would mean more declines and the support shifting to 2,573 points. This level would be a moderate support level, and a close below this would indicate a further decline. There would be next a very important and critical support at 2,519 points.
The probabilities are few for the Nifty to break past this level. If the Nifty closes below this level, market sentiment could turn more bearish.
Among individual stocks, Tata Tea Ltd, Reliance Industries Ltd and Union Bank of India look good on the charts.
Tata Tea, at its last close of Rs617.90, has a target of Rs632 and a stop-loss of Rs597.
Reliance Industries, at its last close of Rs1,156.15, has a target of Rs1,179 and a stop-loss of Rs1,103. Union Bank, at its last close of Rs144.10, has a target of Rs155 and a stop-loss of Rs136.
From the previous week’s recommendations, Suzlon Energy Ltd touched a high of Rs55.20 and met its target of Rs55. Reliance Capital Ltd also met its target of Rs444. Maruti Suzuki India Ltd triggered its stop-loss.
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, Jan 25 2009. 11 14 PM IST