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Indian Stock Market Outlook – Fundamental and Technical analysis

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Indian stock Market closed at a high of above 18000 after two and half years bringing cheers to many stock market investors – Last couple of years, starting Jan 22, 2008 have been quite tough – Sensex had dipped to 8000 levels from a high of 21000 and we are now back at 18k.

So, how does the future look ? Here is my analysis based on certain fundamental & technical analysis.

The Indian Benchmark Indices made a short-term low on May 25, 2010 – at the levels of Sensex 16022 and Nifty 4807. This slump was led by the breakdown of markets from the highs of Sensex 17970, during the first week of April. As most of us know, this bout of correction was triggered by the Greece-led European crisis.

However, the much-needed rescue package announced by the EU-IMF combo has soothed the nerves of the panicky investors and has fuelled a sharp rally in the Indian markets overtaking the April highs at Sensex 18000 levels. This rally comes at a time when other global indices (including China) are still lurking at lower levels, down from their recent peaks.

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What would be Market’s Next Course of Action?

The usual methodology of working of equity market is that they have almost always factored in the current flow of news and analysis. The future market movement will, more over, depend upon the outcome of the unknown events and predications.

Thus, the near-term market movement from here could well be determined by the following 4 factors that could provide a new sense of direction for the key indices:

  1. Progress in Monsoon
  2. Need for Earnings Momentum
  3. Pan out of European Crisis
  4. Global Market Cues

Even if all these 4 events pan out at reasonable levels, markets may well take a positive cue from the action of the news flow without awaiting the final outcome of the said events.

Progress in Monsoon

Markets seem to have partially discounted the likelihood of a good monsoon for this season. Further, expectations are built that a favorable monsoon season would play a crucial role in dampening the double-digit (10.55% in June) inflation by the end of this calendar year.

A good monsoon will also help in bringing down the price of food articles. In fact, analysts are predicting a bumper crop this year with the prospects of good rains. Lower inflation will also tend to give extra leeway to RBI in terms of adjusting its monetary policy.

Need for Earnings Momentum

Markets cannot remain decoupled from the earning prospects of the corporate world for long. Sentiment has to take a backseat sooner rather than later. If the corporate earnings are not as per the market’s expectations, it will come up for punishment.

Over the last few quarters, corporate India has managed to register robust earnings performance on the back of lower base that prevailed during the recession a couple of years ago.

Some amount of fatigue is likely to seep-in starting from June quarter results, as the Indian growth story settles for a time-wise consolidation. Higher inflation, cost pressures, resurgence of high attrition levels and lack of base effect advantage could all take a negative toll on the operational and input costs.

Pan out of European Crisis

Although the concerns about the European crisis seem to have subsided for the time being, the pressures and negative news flow are likely to crop-up on a periodic basis.

In latest, the crisis in the southern Europe flared anew as Portugal suffered a cut in the credit rating of its government’s debt by two notches from Moody’s Investor Services. The rating agency has said that the Portugal government would remain relatively highly indebted for the foreseeable future.

Thus, if the global markets are to again catch a flue on account of the Europe’s debt drama, it is unlikely that Indian markets would be able to maintain its upward journey for long and is likely to float based on broader global cues.

Global Market Cues

Global market cues just cannot be wished away, even as we remain partially disconnected from the same for the time being. Some analysts have come out saying that Indian markets may have decoupled from the global cues and reliance. But, I tend to strongly disagree with the notion.

Once the global cues go full swing with a unilateral medium-term trend (on either sides), it is unlikely that Indian markets will be able to show resistance by moving in a different direction than that of the world markets. Liquidity and global cues are the driving forces of the stock market direction, in current times.

What is the Technical Outlook?

Ok, we have never done Technical Analysis on trak.in here, but here is a start – I’ve attached the daily chart of Nifty inscribed with my personal views and analysis based on the market movement.

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A Summarized Analysis of the Above Chart Patterns:

Red Line: The red line sketched above is a stiff resistance zone for the Nifty situated at around 5380-5400 levels. This zone has twice proved to be a hurdle since the month of April 2010 – during the first week of April and second half of June. We can comfortably term this resistance line as a breakout zone for the markets, from the technical perspective.

Blue Line: The blue line drawn above is a near-term support zone situated at around 5225 levels, a place where markets took support for back-to-back 5-6 trading sessions in the first week of July. It implies that buying support emerged at such levels and traders are expected to fight it out to protect their interests if markets approach this zone again.

Higher Tops and Higher Bottoms: The pink and green circles on the above charts indicate the scenario of higher top and higher bottom. This pattern reflects the market movement in which it takes support at levels higher than the previously established lows and moves towards an upward trend to capture a level which is better than the previously established high.

PS: The above chart shows as to how Nifty has pierced an all-important resistance zone of Nifty 5400 level. But, one cannot completely rule out a case of false breakout – a situation in which traders latch-on to a deceptive move about the market movement and get duped into entering into a wrong positional bet.

My View

My personal opinion is that markets might have actually got a breakout from the Nifty 5400 resistance zone. But, my gut feeling also says that these breakouts won’t be as swift as they should be. No, I don’t mean to say that this might be the false breakout! But, it could be a slow and grinding up move, if at all.

Possibly, I can compare it with an Indian kabbaddi match – a scenario under which a ‘raider’ of one team has to somehow break the blockade, in order to win points by tagging. But, then, the members of the opposition team are so stiff with their grip on the targeted raider that its move towards the boundary line is like notching an inch forward, moment by moment, in increasing order of efforts. The closer the raider moves forward to the blockade line, harder it will be for him to break it, as he runs out of the stamina and energy.

Probably, same can be co-related with the movement of the stock market at every higher level. But, whether the blockade of Sensex at 20000 will be breached or not, only time can tell. Until then, we can only keep forecasting with our varied and differential judgments.

Please participate in this discussion with your valuable thoughts and views.

Disclaimer: The above content/report/chart is only for the educational purpose of the readers. It does not qualify as any advice or recommendation to Buy/Sell securities. The author and the blog are not responsible for the reader’s decisions based on the above report.

  1. […] If you are an investor in Stock Markets, you must read this excellent article on Indian Stock Market Outlook – Fundamental and Technical analysis […]

  2. sharin says

    1. Long term investors should give importance to fundamental analysis rather than technical analysis. Justify the statement. can you please help me to answer this question

  3. madhav sharma says

    i wantsome news about the market if u provide me this, i m very thankful 2 u

  4. Rahu raj says

    Indian markets are going to face further correction up to a mark of 5000-4800. The main reason for this is situation is that retail investors are seeing markets as overvalued and they are exiting by booking profits . but the safest part is FII contribution to indian markets are in a steady rate

  5. Mahesh Patel says

    You have a well defined analysis there. The monsoons have shown lesser surge than expected, however August should explore more positivity in the market. There are other sectors as well which have been recently impacted with the introduction of Direct Tax code. Telecom and Pharmaceutical have taken a beating; Gas and Oil look neutral, whereas Metal and Retail looks more promising. A good due diligence, taking the direct tax code into effect should also form a part of the fundamental analysis. The other facet that could make some investors tremble is the distinction between the mid cap and short cap funds. Phasing out the distinction will have more of an emotional impact on the market. Some good broker portals have points discussed which are worthy of consideration for their fundamental analysis. Check GEPL – http://guptaequities.com/.

  6. Prof R K Gupta says

    What is end result of this analysis?It is merely going through 3 months past history.Does not add any value.Stocks and Nifty can change direction from any stage or at any point .It has to change at some point.The article does not give any pointers to this effect.Such analyses are in hundreds available on Internet. Lacks research base and identification of important variables that can move markets lower or higher.
    In my view relative rate of return and liquidity are major variables for stock markets as there is +-20% insanity part in stock prices.
    I can say that a price has base line price that depends on fundamental strength of stock. For erxample tatamotors it is 680. Rest is all speculation and herd mentality.It also included manipulations of markets by MFs and big operators.The stock market name is ‘ suckers’ game. 95% people loose money here and 5% make it. In my view Indian markets are artificially overblown.With 18-30 PE ratio these are expensive and Indian story is not at all sustainable.We are already overloaded economy. We have no resources, prices are 400% high in last 8 years and povety is increasing.the manner in which top 500 companies in india and MNCs are looting out economy cant go on for a frew months more.

  7. Suresh Wadhwani says

    I don’t think so that market will go beyond 5400 level..even if it so it can’t sustain on that level. We have already outperformed comparing to our peer markets like chinese market, US market, Europe market. Where chinese is market is going down every day, US market are down from last year, problems are the new name in Europe (Rating of portugal came down by 2 points), we can’t sustain very high levels from the existing levels.

    According to me 5000-5100 is the entry level for an investor.

    1. Viral says

      Hello Suresh… Yes, over the last couple of years the pace of market revival has been at a scorching pace from Sensex 8k to 18k – a whooping 10k point rise.

      Its high time markets settle for time-wise consolidation for one more year. But, technicals are showing positive signs. Markets are sustaining at higher levels since around last one year – a sign that demand for stocks is not abating.

  8. Jayshree says

    Thank you for the insightful article! Fundamental analysis based on the parameters stated, it all seems to favour the market moving upwards. The earning momentum is still in progress, although Infy beat expectations, so thats a caveat.

    Technical analysis – seems pro an upswing, will have to wait n watch here cant say anything! :)

    Perceive its a level to sell rather than buy for a long term investor. Around 16-16500 currently seems to be an entry level.

    Thanks for this.

    PS: Being an investor sharing my views.

    1. Viral says

      Hello Jayshree,

      Thanks for sharing your views. Yes, Monsoon seems to have taken-off well, earnings season on its way and global markets doing well with periodic hiccups ensuring that markets remain in check.

      I also agree with your view that it could be a good time to liquidate some 20-25% of one’s portfolio and stay in cash. At the same time, remain invested for a majority portion of the remaining portfolio.

      Investors trading by charts can observe 5200 as a po int below which bears could tighten their grip. Finally, we have also had small re-rating of the Telecom sector, hopefully the momentum will continue over there as well.

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