EGoM meeting on diesel prices in focus
A meeting of the ministerial panel on diesel prices, progress of the monsoon rains and data on industrial production will be on investors' radar next week. A decision on raising diesel price is likely to be taken by the Empowered Group of Minister (EGoM) headed by finance minister Pranab Mukherjee on Thursday, 9 June 2011. If the government hikes diesel prices it will lead to increase in inflationary pressures -- diesel is a key transportation fuel in India.
WEEK
06-06-11 to 10-06-11
NIFTY RANGE
5350-5650
CRUCIAL
SUPPORT 5430 & RESISTANCE 5560
APPROACH
Cautious with positive bias
STRATEGY
Any Dips Should Be Used As An Opportunity To Enter The Markets
MARKET TREND
Trend looks steady for further upmove
MARKET OUTLOOK
Market conditions are not favourable for a secular rally
FACTORS
Macroeconomic Data, EGOM on Fuel & Global Cues
IMPORTANT
Things are pretty volatile and uncertain in the short term
Ø OUT-LOOK:
The price action of Nifty for the last few days has only been an enactment of our prognosis. We were on our toes and remained contrarians' inspite of underlying bearish sentiment around 5300 levels. The encouraging upmove of the markets for the last two weeks has again proved our views correct.
The penultimate and the last day of the previous week may have subdued the strong optimism. There has been a strong rally from the lows of 5330 to high of 5600 and it should only be natural to anticipate few days of pullback. Also the level of 5600 coincides with the 200 DEMA. Hence, such pull back should be construed as healthy as long as key supports on the downside are held. In the short term, we may be undergoing such a phase and post this ,there is a high probability for the Nifty to breach the level of 5600 in the coming weeks. A decisive breach of 5600 level should clear the way for further advance till 5750.
Our views on the midcap index have proved quite accurate. Its strength on the way down and on the way up, makes this index a good candidate for outperformance in the medium term.
Overall, the trend looks steady for further upmove and any dips should be used as an opportunity to enter the markets.
Ø ROAD AHEAD:
The Indian market continues to witness zigzag movements without any clear bias and sense of direction. It is seeing alternating bouts of buying and selling based on certain news flow. Though FII flows have improved slightly, the influx is still not strong enough to lift the key indices substantially. At the same time, macroeconomic landscape remains challenging and the Centre is still grappling with issues of corruption, leaving policy making in a limbo.
This week will yet again be a litmus test for the UPA II as the EGoM on fuel prices assembles. Let's hope the meet doesn't get postponed further. But, if it does take place one must brace for a spike in headline inflation in the days to come. The RBI will decide on policy rates on June 16. Before that, the market will react to April IIP data on June 10 and May inflation on June 14. In the meantime, the progress in monsoon will also have a sentimental impact on the market.
Globally, investors are on tenterhooks amid worries about anemic growth in the US economy and lingering concerns over sovereign debt problems in the eurozone. Hopefully, the Greece situation will get resolved over the weekend. On Monday, world markets could head south after the US jobs data came in much below expectations. Interest rate decisions are due next week from the central banks in UK, EU and Australia.
In short, market conditions are not favourable for a secular rally. Things are pretty volatile and uncertain in the short term. There is a general lack of confidence among investors at this juncture. This may take a while to change. So, be vigilant and stick to stock centric approach to avoid major hit in your portfolio. Wait for the market to signal a decisive breakout from the current range before resuming your shopping binge.
Ø DERIVATIVES:
High inflation and interest rate would keep the market bias negative for some time
Addition of OI of the 5400 to 5700 strike call due to writing, while at the same time addition of OI due to buying in the 5700 strike put option indicate heavy resistance ahead
Prospects of good monsoon helped the domestic bourses to record gain during the week ended 3rd June 2011. As mentioned during the previous week, there wasn't enough conviction on the bull side despite addition of long position. Consequently the S&P nifty index recorded gain during the beginning of the week helped by firm global market and the prospects of good monsoon this year. However widening 2G scam, which threatens to include some more corporate and the failure on the part of Reliance to explain lower gas output from the KG basin during their AGM held on Friday resulted in the market correcting sharply on Friday. The nifty fell by 41.65 points and 33.60 points on Thursday and Friday respectively. However for the full week under review, the benchmark nifty closed 40.65 points higher at 5516.75.
The nifty June series future closed at a premium of 6.75 at 5523.50 on Friday. In the futures and option (F&O) segment, both the nifty and the stock future segment added open interest (OI) due to buying initially, however subsequently a lot of those longs where covered while fresh shorts were created in both the counter to wards the end of the week, especially on Thursday and Friday. In the nifty option segment too aggressive short position were created in the 5500 and up call strikes towards the end of the week, while the 5400 and up strike puts witnessed unwinding of puts wrote earlier, thus indicating strong resistance going ahead.
The nifty June series future contract added 4.88 lakh shares in OI on Friday to take the total OI to 2.48 crore shares. During the full week under review the nifty June future added 33.01 lakh shares in OI. Again the market appears to carry the negative bias as there could be some more consolidation going ahead. The domestic monsoon trend and the institution investor buying behavior will be closely watched. High inflation is a major concern for the domestic market while high prevailing interest rate and the expectation of further hike in interest rate do not bode well for Indian industries going ahead. Post the Q4 FY11 result announcements, the forward earnings are being revised downward by major brokerages for most of the sectors. Thus the going ahead may be tough as the market starts discounting these factors. Meanwhile the average traded volume in the futures and option (F&O) segment during the week under review was considerably lower at Rs 79927.79 crore as compared to Rs 145296.66 crore during the previous week, understandably as this was the first week of the new series.
The index put-call ratio on Friday fell to 1.09 as compared to 1.39 during the previous trading day, while the stock put-call ratio increased to 0.44 as compared to 0.38 the previous day. The overall put-call ratio fell to 1.04 as compared to 1.29 the previous trading day.
The market-wide OI on Friday stood at 224.98 crore shares, 2.85 crore shares higher than the previous day. The index and stock option segment witnessed significant addition of OI during the week.
On Friday the 5400 to 5700 strike call option added aggressive OI due to writing, while the 5400 to 5600 strike put option shed OI as put wrote at this level earlier were aggressively covered. Thus there was significant unwinding of long positions during the week. The 5800 strike call option shed OI due to unwinding of calls bought earlier, while the 5700 strike put option added OI due to buying, indicating heavy resistance ahead. The 5500, 5600 and 5700 strike call option added 6.15 lakh shares, 8.71 lakh shares and 8.21 lakh shares respectively in OI to take their total OI to 39.64 lakh shares, 56.84 lakh shares and 57.82 lakh shares respectively. The 5800 strike call option shed 2.53 lakh shares in OI to take its total OI to 65.33 lakh shares. The 5700 strike put option added 3.59 lakh shares in OI to take its total OI to 11.33 lakh shares
Ø TECHNICALLY:
· Medium Term Indicator: The short term/ medium term indicator continue to be on the buy mode. This should support a positive undertone for the Nifty.
· 200 DAY SMA: The 200 Day SMA for the Nifty is currently at 5750. Going by historical evidence, there is a good chance that this level should act as a resistance for the Nifty.
· Outlook: Earlier, we had highlighted the following pionts to support an impending upmove and a possible trend reversal for the Nifty. 1) Pace of rallies is faster than the pace of declines indicating a shift of sentiment. 2) Accumulation pattern which are now becoming evident in the short term. 3) Oversold technical indicators which are now exhibiting positive divergence. 4) Weekly candlestick chart showed a "Dragon Fly Doji" which is a bullish reversal pattern. A good closing for the last week has confirmed this reversal pattern. These factors reaffirm our bullish view in the medium term. Target on the upside should be near the area of 200 Day SMA which comes to around 5750. Moreover, the 200 Day EMA is at 5600 and this level is acting as the logical resistance for the trend.
Ø MACROECONOMIC:
Investors will closely watch macroeconomic data in the near term, which could provide a cue on the Reserve Bank of India's (RBI) likely monetary policy stance at its mid-quarter policy review on 16 June 2011. The government unveils data on industrial production for April 2011 on Friday, 10 June 2011. The government releases data on headline inflation for May 2011 on 14 June 2011.
Ø MONSOON:
Investors will continue to watch the progress of the annual monsoon rains. The India Meteorological Department (IMD) has predicted the southwest monsoon 2011 to be 98% (normal) of the long period average (LPA) with a model error of plus/minus 5%. IMD has indicated that there is very low probability for the season rainfall to be deficient (below 90% of LPA) or excess (above 110% of LPA).
Good rains would help ease food inflation and boost rural income. Rainfall that comes within 96% to 104% of the long-term average is considered a normal monsoon season, but this alone doesn't guarantee a good crop. The timing and spread of the rains are equally important. The quantity and geographical spread of rainfall during the monsoon season is crucial for India's agriculture sector, which lacks irrigation facilities on more than half its farm land. Monsoon rains usually enter India's mainland through the southern state of Kerala in the first week of June, gradually progressing to cover most of central and northern India by July, before retreating in September.
Ø SECTORIAL:
· CNX Defty's: upmove from the lows of 4100 has been encouraging. There is a fair chance that a short term uptrend may have begun and further upsides remains a high possibility in the coming weeks.
· BSE PSU: has moved on anticipated lines, its trend still looks good for further advances closer to 8800.
· BSE Bankex: has achieved our upside target of 12500 and may continue to scale higher. Any declines may only be corrective in nature to this short term uptrend.
· BSE IT: continues to be in a technical short term downtrend. The drifting nature of this weak trend is likely to continue.
· The BSE Cap Goods: has been one of the strong sector for the last few weeks. Its uptrend remains intact. Target on the upside to watch out is 13500 followed by 13800.
· BSE Auto: index remained subdued and underperformed for the major part of last week. The strucutre of its downtrend suggest that there may be minimal downsides. A trend change cannot be ruled out in the coming week.
Ø GLOBAL WATCH:
· S&P 500: had a pull back closer to $1340 level but it lost all its gains towards the end of last week. Technically, it still remains in a downtrend with support at 1295.
· Bovespa: has remained largely sideways with a positve bias. Although its trend is still down, but a close above 65000 would lead to further advances. It is likely to consolidate for a few sessions.
· SSE: has achieved our downside target of around 2650. Its downtrend remains intact.
· Hang Seng: saw a high of 23700 before retracing to close at 22950. The undertone suggests of a positive trend in the short term. Strong support on the downside is at 22500.
· Nikkei: retraced after touching a high of 9700 last week. It is in a consolidation phase and could remain in this phase for some more time.
· FTSE: is in a volatile sideways phase with slightly negative bias. It could consolidate for some more time.
· MSCI EMI's: move from the lows of 1112 indicates that its uptrend may continue in the short term. 1170 is an important resistance above which it can advance closer to 1210 levels.
IN-A-NUTSHEL:
Going ahead post the Q4FY11 results many of the brokerages are revising downward the earnings estimates for FY12 and FY13. Thus when the market starts discounting these factors, the market may further correct. Aggressive addition of OI of the 5400 to 5700 strike call due to writing, while at the same time addition of OI due to buying in the 5700 strike put option indicate heavy resistance ahead. The domestic monsoon trend and the institution investor buying behavior will be closely watched. High inflation and high domestic interest rate would keep the market bias negative for some time.
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