Key indices slipped below psychologically important support levels on heavy profit selling by funds and traders last week. The decline had been expected because the markets were ripe for a technical correction. The big question at this point of time: Where are the markets headed now? Purely from a technical angle, the markets are likely to consolidate in the immediate term and then post gains. From a short-term standpoint, the downward pressure has still not eased. In fact, this week will set the direction of the markets. If a recovery takes place on expected lines, as mentioned in the technical section later in this column, only then will the pressure abate.
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Prospects of monetary tightening by China, following a spurt in inflation, remained the core concern for global markets last week. Speculation of a further hike in interest rates in China stoked fears that demand for commodities could cool, possibly resulting in the pace of global economic recovery slowing. On Friday, the People’s Bank of China increased banks’ required reserve ratio by 50 basis points, its fifth such hike this year. One basis point is one-hundredth of a percentage point. Including an earlier temporary increase, the move takes the ratio to 18.5% for big banks, a record high. The increase, which takes effect on 29 November, should lock up around 350 billion yuan ($52.7 billion) that banks could otherwise have lent. Recently, the People’s Bank of China also raised its benchmark rates to cool excessive demand. Since global markets had been braced for another rate hike by China, the increase in reserve requirements came as a relief that wasn’t reflected in the markets. Metals on the London Metals Exchange and crude on Nymex both ended lower. Even European stock markets declined. US markets ended higher as semiconductor stocks rallied following robust revenue growth for Marvell Technologies Group Ltd. The general sentiment remained cautious.
Going forward, globally the markets are at a crucial juncture. Positive economic data is supporting a recovery on the markets, but negative investor sentiment is acting as a drag. Concerns about Ireland’s finances have, however, receded following talk of a bailout plan likely to be announced early this week. Stock markets may have some relief in the beginning of the week, but fears over the debt situation in European countries such as Spain and Portugal will continue to haunt investors.
The US government’s second estimate of third quarter gross domestic product growth is scheduled to be released this week, which is expected to show the economy grew a bit faster than earlier estimated. Existing home sales and new sales report are also due to be unveiled in the week. The existing home sales report is expected to show a drop in October sales. New homes sales are likely to show little change. US reports on manufacturing, consumer spending and inflation would also be watched closely.
Traditionally, this week is watched closely for cues on consumer spending as the day after thanksgiving traditionally marks the start of the US holiday shopping season. Last but not the least, the minutes of the policy-setting meeting in which US officials discussed the decision to buy $600 billion (Rs 27.2 trillion today) in bonds to stimulate the economy would also be scrutinized.
Back home, there are no major triggers lined up this week. The domestic economic calendar is very light, meaning the markets would continue to take their cues from overseas.
Technically, the markets are likely to consolidate now before posting new gains. My technical studies now suggest that after some consolidation early in the week, the markets are gearing up for a decent rally. The Nifty, on its way up, faces strong resistance at 6,029 points. If the Nifty closes above this level, it would be the first indication of the beginning of a rally, which has a target of 6,187. At current levels, this means a gain of roughly 300 points. On its way down last week, the Nifty saw decent support at 5,864, which was very close to the level of 5,856 mentioned in my last column. Strong support for the Nifty has now shifted to 5,712.
Among individual stocks this week, ABB Ltd, Orchid Chemicals and Pharmaceuticals Ltd and Housing Development Finance Corp. Ltd (HDFC) look good on the charts. ABB, at its last close of Rs 835.15, has a target of Rs 854 and a stop-loss of Rs 811. Orchid Chemicals, at its last close of Rs 296.65, has a target of Rs 314 and a stop-loss of Rs 278. HDFC, at its last close of Rs 695.35, has a target of Rs 716 and a stop-loss of Rs 672.
Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at email@example.com