Indian Stock Market Outlook – Fundamental and Technical analysis

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.

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.

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.