Markets entered their consolidation phase last week despite surprising domestic economic indicators and positive global cues. This is primarily because liquidity, which was driving the markets higher for the past three weeks, dried up a bit and sentiments took centre stage.
A weak monsoon spread gloom all around and dampened sentiments on bourses. However, I would rate the last week as the best for this financial year as far as the economic sentiment goes. It is worth mentioning here that the Index of Industrial Production data for June was superb and well above expectations.
The June industrial output rose 7.8%, expanding at its fastest pace in 16 months and beating forecasts by a wide margin as higher salaries of government employees and stimulus spending boosted consumer demand. In fact, if the industrial output sustains the strong momentum seen in June, then it would help mitigate the effects of a poor monsoon season on overall economic growth.
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However, the caution due to monsoon was weighing so heavily that market initially ignored this stupendous show of Indian industries and witnessed sharp fall.
Cause of concern: A parched field on the outskirts of Agartala. A weak monsoon spread gloom and dampened sentiment on the bourses. Parthajit Datta / AFP
The next big thing was the new tax code, which the government proposes to introduce in the winter session of Parliament, which if passed, could be implemented by 2011.
The new tax code was also a pleasant surprise for both individual and corporate taxpayers. From the economic point of view, it is positive as it would promote both savings and consumption, as more money would be left in the hands of consumers.
So, I think, last week was very forward looking and promising for the economy and the bourses. Adding to the positive sentiments, good rains in the last 48 hours in Uttar Pradesh, which is the sugar bowl of the country, and in central India, which is the biggest producer of soybean and oilseed crops, have revived the hopes that the impact of monsoon on the economy may not be very harsh eventually.
It is worth mentioning here that monsoon rains were 54% below normal in the week to 12 August, improving from 64% deficit in the previous week. Total rainfall since the start of June was 29% below average. Moreover, forecast by India’s weather office ruling out an early withdrawal for this year’s monsoon, which has still one and half months to complete its full journey, has boosted the confidence.
Globally, the markets got a major boost after the US Federal Reserve said on Wednesday that the US economy was showing signs of levelling out two years after the onset of the deepest financial crisis in decades and it moved to phase out one emergency measure. The US central bank also kept its benchmark short-term interest rate steady near zero and said it would likely stay there for an extended period to guide the way to recovery.
The Fed made its clearest statement to date that it sees the recession nearing an end and that shattered financial markets are healing. This was good enough a sign for markets to rejoice and equities across the globe roared on positive sentiments building around the troubled US and European economies. China was, however, a dampener this week, with its key indices settling at their lowest levels in six weeks and posting their biggest weekly drop in five months.
Back home, Indian indices ended with gains and look positive for the coming week. Technically, the market has still enough steam left to touch its new 52-week high this week. The starting on bourses this week may not be on encouraging notes and there could be some consolidation initially, but the key technical studies are pointing to a rebound from early lows and building up of fresh northward momentum.
Though this is strongly in contrast to general market sentiments, my technical studies hold the view in favour of gains over this week. Though immediate-term indicators are showing some weakness, which might help in a weak opening, I am expecting a recovery shortly.
In terms of the index on the Bombay Stock Exchange, the rising Sensex would test its first resistance at 15,529 points. This is an important resistance as breach of this resistance level would trigger gains as the resistance level would then shift to 15,685 points. This level, too, would be interesting to watch as it might force some consolidation and even mild profit selling also.
However, it would not pose any serious threat to the rising Sensex and the next resistance level would then come at 15,764 points. This would be a minor resistance level but would be crucial for the rising Sensex because if it fails to close above this level with good volumes, then this could trigger a retreat. If Sensex closes above this level with good volumes, it would mean strengthening of positive sentiments.
However, there is a strong resistance at 15,972, which if broken would boost the rally with a sharp spurt of roughly 260 points as the next crucial resistance would be at 16,232.
While on its way down, the Sensex will have its first resistance at 15,217 points, which is an important support level. A fall beyond this level would be bearish but a close below this level would be a strong signal of further fall in the Sensex, which would find its next support only at 15,028 points.
If this level goes, the next support would come at 14,704 points, which would decide the short-term outlook of the market because if this level is also breached, then the positive sentiments would end in the short-term.
In terms of the S&P CNX Nifty on the National Stock Exchange, the resistance for a rising Nifty would come at 4,612 points, followed by immediate resistance at 4,642 points and finally at trend-deciding resistance at 4,719 points. A close above this level would be bullish as it would push the resistance at 4,804 points.
On its way down, the Nifty will test its first support at 4,509 points, followed by the next but moderate support at 4,463 points and a short-term, trend-deciding support at 4,353 points. A close below this level would be bearish.
Among individual stocks, this week Larsen and Toubro Ltd (L&T), Titan Industries Ltd and Triveni Engineering and Industries Ltd look good on the charts. L&T, at its last close of Rs1,486.45, has a target of Rs1,515 and a stop-loss of Rs1,451. Titan Industries, at its last close of Rs1,200.55 has a target of Rs1,237 and a stop-loss of Rs1,163, while Triveni, at its last close of Rs111.15 has a target of Rs119 and a stop-loss of Rs103.
From my previous week’s recommendations, Reliance Infrastructure Ltd, L&T and Bank of Baroda all met their targets comfortably.
Vipul Verma is CEO, Moneyvistas.com. Your comments, questions and reactions to this column are welcome at email@example.com