As expected, Indian markets fell over the past week in line with the global trend. The benchmark indices, the Sensex on the Bombay Stock Exchange and the Nifty on the National Stock Exchange, fell around 1.5% in the week, but ended above their weekly lows. I had mentioned in my last column that the Nifty would find strong support at 5,491 points. It fell on Tuesday to 5,496 and bounced back strongly. Technically, this was a crucial level and my analysis strongly favoured a bounce from here. This has brightened recovery prospects.
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I also mentioned last week that the dollar index could see a strong rally, triggering weakness in equity markets. It did shoot up to 76.70 from 75 points on Monday and Tuesday while Indian markets fell. The recovery on the bourses also coincided with a sharp pull back in the dollar index.
The US bourses fell 1.5-2.5%. European bourses fell over 2.5%, with France’s CAC 40 registering 4.78%. China was a surprise gainer. The fall on global bourses was triggered by weak economic data and new dimensions in the euro zone debt crisis. There were also concerns over the US government’s ability to avoid a default. Investors have, so far, not been affected by the acrimonious debate in Washington about raising the debt ceiling, which is necessary to avoid a default, as they largely believe a deal will be reached before the 2 August deadline. Therefore, no one is talking about the threat of a catastrophic US government default. Weak US economic data, though, dampened enthusiasm, and it was further dented by Federal Reserve chairman Ben Bernanke’s comments on the state of the US economy. However, equities shot up on Bernanke’s statement that there may be a third round of stimulus. Earnings announcements have been good so far with banks, including JP Morgan and Citibank, reporting forecast beating earnings and Google Inc. reporting bumper quarterly results.
I was expecting the result of the European bank stress test to lift the gloom and be a booster for global markets. But it failed to cheer the markets despite being better than expected—only eight banks failed the test out of 90. News from China was encouraging this week, with second quarter gross domestic product (GDP) numbers beating estimates and showing the growth engine of the world has not slowed. High inflation, however, remained a concern.
This week, the broad outlook for Indian markets is cautiously optimistic. The Reserve Bank of India (RBI), in a 26 July policy review meeting, is expected to raise interest rates by 25 basis points, which has been discounted in prices. (One basis point is 0.01%). Earnings will also weigh on market sentiments. No major economic indicators are due this week and Indian markets will take cues from global markets for direction.
Key indicators that can influence US bourses include several reports on the housing market: June housing starts on Tuesday and existing home sales on Wednesday. In addition, data is due on leading economic indicators for June and the Philadelphia Fed survey of manufacturing activity in the Mid-Atlantic region.
Technically, the markets are looking positive with the first resistance for the Nifty coming at 5,617. Though classical technical studies do not suggest any major hiccup at this level, an important study is suggesting there will be mild profit booking, which could be an intra-day phenomenon. However, if the Nifty retreats with volumes, the litmus test for the immediate trend will be the support at 5,556. If broken, this could weaken the outlook and pull the Nifty down to 5,491, which is a strong support. A further fall led by strong volumes will weaken this level and the Nifty could then fall to the next support level of 5,348.
If the Nifty breaches the resistance at 5,617, it will head for the next resistance level at 5.649, which is again a moderate but crucial resistance. A close above this will be a welcome sign as next resistance is 5,737, followed by a strong resistance at 5,814.
Among individual stocks this week, Infrastructure Development Finance Co. Ltd (IDFC), Hindalco Industries Ltd and ACC Ltd look good on the charts. IDFC, at its last close of Rs 138.95, has a target of Rs 146, and a stop-loss of Rs 131.
Hindalco, at its last close of Rs 176.60, has a target of Rs 182, and a stop-loss of Rs 170. ACC Ltd, at its last close of Rs 980.15, has a target of Rs 999, and a stop-loss of Rs 961.
From my previous week’s recommendations Oil and Natural Gas Corp. Ltd (ONCG), Jet Airways India Ltd and Indian Bank all met their targets easily.
Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at email@example.com