Slight optimism in the air; trading volumes will be key

Slight optimism in the air; trading volumes will be key
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First Published: Mon, Apr 06 2009. 12 13 AM IST

Updated: Mon, Apr 06 2009. 12 13 AM IST
Optimism about a global economic turnaround and a growing belief that the worst is behind fuelled a rally on Indian stock markets. The week began with a sharp fall on Monday, but the momentum behind the three-week-old rally pulled the market back into the bull orbit. The Bombay Stock Exchange’s benchmark index, the Sensex, gained about 300 points, or roughly 3%, while the S&P CNX Nifty gained 102.4 points, or 3.29%, over the week. The Indian market’s performance was not the best in the world—stock exchanges in other countries, from the US and Brazil to Singapore, gained more—but given that Indian stock markets were closed for a holiday on Friday, it wasn’t bad. The big question now: Will the rally continue and for how long?
There’s no definite answer to the question because there are many variables that emerge daily and have a short-term impact on the market. However, what looks reasonably certain at this point is that, on the one hand, the market has bottomed and, on the other, this is a short-term bull run, which should logically end with consolidation rather than new lows. There is a lot of debate about this being a bear market rally. This column noted, when the Sensex was hovering around 9,000 points, that the rally could extend to 12,000 points and that bear market rallies are normally not so extensive. Moreover, the increased influx of liquidity is another signal that the worst is behind.
Now the second question, how long will it last?. Technically speaking, this rally will end at nearly 3,600 points on the Nifty and 12,056 points on the Sensex.
However, it will not be a one-way journey as the coming weeks would bring many gyrations. The first and foremost factor would be the fiscal year and fourth-quarter earnings announcements by companies. Though experts are expecting some shocks, the worst has already been factored in by the markets; what would matter more is the revenue guidance by companies for the next quarter and the financial year. If this revenue guidance comes at par with or better than expectations, it could give a fresh impetus to the rally. But investors would do well to wait, watch and then act.
For this week the immediate trend is up and Monday should be another good day on the markets. The last available market statistics and technical studies put together are showing good momentum. But the closing on Monday would be vital and set the tone for the rest of the week. More than the size of the gain, it would be important to focus on trading volumes. If the volume of trading associated with a rise is greater than those with a drop and if aggregate volume is on the higher side, it would reflect the underlying strength of the rally.
Bull orbit? The Bombay Stock Exchange building in Mumbai. The benchmark index, the Sensex, gained about 300 points, or roughly 3%, while the S&P CNX Nifty gained 102.4 points, or 3.29%, over the week. Ashesh Shah / Mint
In terms of support and resistance, the Sensex would find its next resistance at 10,581 points, which would be a moderate level and may not arrest upward momentum. If the Sensex crosses this level, the next resistance would come at 10,738 points, which is likely to be tougher; it might pause briefly around this level. If it scales this level too, there would be another critical resistance at 10,883 points.
Once over this hump, the rally would enter its second level, which is typically expected after some technical correction or consolidation. The resistance level in the second stage of the rally would emerge at 11,283 points, followed by the next and the most critical resistance at 11,843 points. However, a technical correction is as important as the rally itself and is bound to happen sooner than later. I expect a correction and consolidation in the first level of the rally, which faces very strong resistance at 10,883 points.
On the way down, the first support is at 10,082 points, which is a moderate support level, following which there is very important support at 9,912 points. You can sense trouble if the Sensex breaches this level on high trading volumes. Negative sentiment will take over. However, there would be rock solid support at 9,743 points.
Among individual stocks, this week Aban Offshore Ltd, Tata Communications Ltd and Sterlite Industries (Indai) Ltd look good on the charts. Aban Offshore, at its last close of Rs406.75, has a target of Rs421 and a stop-loss of Rs389. Tata Communications, at its last close of Rs527.25, has a target of Rs541 and a stop-loss of Rs511. Sterlite Industries, at its last close of Rs371.85, has a target of Rs389 and a stop-loss of Rs351.
From previous week’s recommendations, Allahabad Bank hit a high of Rs44.40 and met its target of Rs44 easily. Bharat Earth Movers Ltd gained 17.6% and touched a high of Rs441.80; needless to say the stock met its target of Rs389 comfortably. Dabur India Ltd touched a high of Rs100, above its target of Rs98.
 Vipul Verma is CEO, Moneyvistas.com. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Mon, Apr 06 2009. 12 13 AM IST