Share prices rallied for a fifth straight week on bargain buying by funds and traders who took their cue from positive global sentiment. Foreign funds stepped up their buying in a holiday-shortened week—the markets were closed on Tuesday and Friday—although two major domestic economic indicators spread no cheer.
Data showed that India’s factory output shrank 1.2% in February. Industrial output grew 2.8% during April-February, from 8.8% in the year-ago period. Wholesale price inflation inched closer to zero. The numbers were more or less in line with market expectations, although they don’t hint at a rebound anytime soon.
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Globally, there was a burst of optimism on the markets as US home lender Wells Fargo and Co. said in its preliminary earnings report on Thursday that it likely posted a record first-quarter profit, and investors speculated that US banks will pass government stress tests. Wells Fargo’s announcement reinforced expectations of an end to the slump in the financial industry and sparked a rally in banking shares.
Undertone positive: The Wells Fargo and Co. headquarters in San Francisco, US. Globally, there was a burst of optimism on the markets as US home lender Wells Fargo said it was likely to post a record Q1 profit. Kim White / Bloomberg
Back home, the corporate earnings season will gain momentum this week and it will have its impact on the stock markets. With the market undertone being positive, as optimism over a global economic recovery outweighs scepticism about past corporate performance, investors will likely focus more on revenue guidance than on actual numbers. Revenue guidance numbers will be critical in charting the course of the markets.
Technically, the markets are on a strong footing and a study of key indicators shows that the market rally has still steam left. Widely used basic tools such as the advance-decline ratio and trading volumes suggest that despite the recent rally the market is not yet overbought.
Rising prices are being greeted by higher volumes, which is maintaining the momentum on the markets. The markets do not become overbought unless rising prices and volumes become inversely proportional. In the present scenario, prices and volumes are directly proportional.
Going forward, this week the market will extend gains on Monday. Tuesday being a holiday, caution could prevail in late trading on Monday. But optimism would keep the momentum alive.
The Sensex, on its way up, would test its first resistance at 10,923 points, which is now a minor resistance level. If this resistance is breached, the next level would come up at 11,262 points, which would be a moderate level. If the Sensex crosses this level on heavy volumes, the rally would strengthen and the index would aim for 11,831 points, which is expected to be a very strong resistance level. Between this and the previous resistance levels, there would be moderate resistance at 11,353 and 11,515 points as well, but they may not retard the index’s northward progress.
On its way down, the first support is expected at 10,660 points, which is a moderate yet important level. A close below this level on high volumes would be the first sign of a peaking out of the rally. It would be followed by the next important support level at 10,420 points.
The next support level at 10,167 points would be the most closely watched—a close below this level would mean a dampening of positive market sentiment.
In the S&P CNX Nifty, the immediate resistance lies at 3,400 points, which is a minor resistance level. If this level goes, the next resistance would be at 3,445 points, which is again a minor level. The next resistance at 3,499 points would be important because a close above this level would be considered bullish. However, a pullback from this level would mean the emergence of profit selling. In case this resistance is breached, the Nifty would be all set to touch the target of 3,600 points this column mentioned a few weeks ago. The next resistance lies at 3,612 points.
On its way down, Nifty would test its first support at 3,302 points, followed next by 3,227. There is solid support at 3,148 points, which is the most critical. A close below this level would be considered very bearish.
Among individual stocks, Reliance Communications Ltd, Hindalco Industries Ltd and Kotak Mahindra Bank Ltd look good on the charts. Reliance Communications, at its last close of Rs211.95, has a target of Rs224 and a stop-loss of Rs197. Hindalco Industries, at its last close of Rs58.95, has a target of Rs65 and a stop-loss of Rs52. Kotak Mahindra Bank, at its last close of Rs371.70, has a target of Rs387 and a stop-loss of Rs355.
From the previous week’s recommendations, Aban Offshore Ltd hit a high of Rs465, which was well above its target of Rs421. Tata Communications Ltd gained more than 11% and met its target of Rs541 very easily. Sterlite Industries (India) Ltd touched a high of Rs406.50, which was significantly above its target of Rs389.
Vipul Verma is CEO, Moneyvistas.com. Your comments, questions and reactions to this column are welcome at email@example.com