Technicals point to more steam in the market rally

Technicals point to more steam in the market rally

For a traditionally weak month, the start to September has been upbeat as global markets rallied on signs of economic recovery gaining strength.

Last week began with better-than-expected Chinese manufacturing purchasing managers’ index (PMI) data for August, which bolstered investor confidence about the Chinese economy and raised hopes that concerns of a slowdown may have been overdone.

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A string of positive numbers from across the globe followed including the HSBC Markit manufacturing PMI data for India, albeit slightly below expectations, an unexpected rise in the Institute for Supply Management index on US manufacturing, stronger-than-expected US pending homes sales in July, and a second consecutive week of lower initial claims for jobless benefits.

The non-farm payroll data for August released on Friday in the US was a key milestone, raising questions whether the talk of a double-dip recession in the US had been exaggerated given that the US economy was creating more jobs than expected.

This is a potential turning point for US markets as job creation is key to recovery in the world’s biggest economy.

A build-up of positive sentiment could trickle down to other sectors as well, including retail and housing which have lagged behind in the first phase of US economic recovery.

Still, I would rather wait for housing, consumer spending, retail and consumer confidence data for more cues on the state of the US economy.

As of now, sentiment is definitely positive in the US, which may drive global stock markets higher this week.

The markets are likely to start the week on a positive note, tracking the strong close in the US on Friday.

However, gains are likely to be limited, with US markets closed on Monday for Labour Day. Asian markets are likely to post moderate gains. In India, the Nifty is likely to open above the key 5,500 points level. The question is about sustainability of the trend, which would depend largely on global cues. The only domestic economic data due in the week is industrial output numbers scheduled for release on 10 September. Important economic indicators in the US this week include international trade figures on Thursday and wholesale inventories on Friday. Apart from this, the weekly jobless claims data would also be watched closely for confirmation of the trend in US employment numbers. Chinese foreign trade data, which is due on 10 September, would also be closely studied. A rise in Chinese imports would be another positive indication for global markets. In India, the markets will be closed on 10 September for a holiday. Technically, key indices are pointing up. All major short-term indicators including moving averages and relative strength are firm. On its way up, the Nifty faces resistance at 5,505 points, which is a moderate level that, if crossed, would propel the index to 5,532 points and may set the stage for consolidation.

If the Nifty manages to close convincingly above this level, it would be poised for higher levels such as 5,578 points. On purely technical parameters, the Nifty has the potential to cross even the 5,700 level although not this week.

On the downside, the Nifty has its first support at 5,471 points. If the Nifty breaks below this level, it has decent support at 5,441 points, followed by critical support at 5,348.

A close below the latter level on supporting volumes would be seen as a bearish signal. The index could decline to as low as 5,191.

The chances of an advance, however, outweigh prospects of a decline, making it likely that the index will post another gain this week.

Among individual stocks this week, Federal Bank Ltd, LIC Housing Finance Ltd and Mphasis Ltd look good on the charts.

Federal Bank, at its last closing price of Rs346.35, has a target of Rs358 and a stop-loss of Rs336. LIC Housing Finance, at its last close of Rs1,214.50, has a target of Rs1,238 and a stop-loss of Rs1,184. Mphasis, at its last close of Rs626.25, has a target of Rs641 and a stop-loss of Rs608.

Vipul Verma is chief executive officer, Comments, questions and reactions to this column are welcome at