Heavy buying by foreign funds, coupled with the release of positive economic data at home and overseas, stoked the rally on Indian stock markets last week. The increases in policy rates announced by the Reserve Bank of India (RBI) in its mid-quarter policy review did not dent the confidence of investors, who drove the key Bombay Stock Exchange index, the Sensex, up 4.23% during the week, with nine of its 30 components posting record highs. The performance of Indian stock markets last week was the best in 10 months. For the second week in a row, they outperformed overseas stock markets.

Other factors contributing to the positive sentiment included an increase in advance tax collections, which bolstered investor confidence that the performance of Indian companies remains robust. Though momentum may push key indices higher, a sense of caution has started creeping in among investors because valuations have become quite expensive. I would recommend a selective approach in buying stocks unless the markets receive a boost from fundamental economic factors, especially from the US.

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Globally, the markets are in a bullish phase despite European indices ending with moderate losses for the week. Since European and US markets are technically at a crucial juncture, any breakout on the positive side could extend gains on global bourses. The US S&P 500 index faces key resistance at 1,130 points, which if broken could lead to a strong rally on US markets, fuelling further gains elsewhere. The S&P 500 briefly crossed this level on Friday, but failed to sustain it and fell back on profit selling.

From the standpoint of economic fundamentals, too, this week is very important with some crucial microeconomic leads due in the US. The most important one is the Federal Open Market Committee (FOMC) meeting on Tuesday, which would take a call on the direction of interest rates in the US. In late August, Federal Reserve chairman Ben Bernanke said he may opt for a further easing of monetary conditions only in case of a deterioration in the US economy. In the last one month, the US economy has shown considerable progress so there are few hopes of any kind of monetary easing by the Fed. But there are strong expectations that the Fed may be forced to step up treasury purchases, which could be a boost to the US and global economies. Among other critical data due this week in the US, the housing indicators are important. From the housing market index on Monday to housing starts on Tuesday, followed by existing home sales on Thursday and new home sales on Friday, investors will be able to get a clearer picture of a key sector that must improve before a US economic recovery can really kick in.

Back home, the technical outlook for the markets remains cautiously positive as of now and more gains are likely in the initial part of the week. On Monday, the S&P CNX Nifty could test its critical resistance level at 5,929 points, which is likely to see some consolidation and profit selling. If this level is breached on good volumes, it would come up against its next resistance at 5,979, which is again a crucial level. A break above this level could place the Nifty well above 6,000, pushing the next resistance to 6,048.

On the downside, the first support level for the Nifty is at 5,816. If this level is breached, the next support would come at 5,734, which is likely to prop up a falling Nifty. A close below this level would mean a further decline, to 5,648.

Among individual stocks this week, Sesa Goa Ltd, Reliance Infrastructure Ltd and Aban Offshore Ltd look good on the charts. Sesa Goa, at its last close of 325.25, has a target of 337 and a stop-loss of 312. Reliance Infra, at its last close of 1,061.55, has a target of 1,082 and a stop-loss of 1,037 while Aban Offshore, at its last close of 833.85, has a target of 848 and a stop-loss of 814.

Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at ticker@livemint.com