Indian Stock Markets at formidable resistance

Levels of around 15600 for the sensex and 4600 for the nifty turned out to be formidable resistance levels for the markets. Markets corrected from that level to 14000 for the sensex and 4150 for the nifty. This is a very important zone. For, from around these levels the market reversed trend in the past on a number of occasions during the past year and a half. Sometimes this level served as resistance and on some occasions it served as support to a previous fall. It is worthwhile to mention that there is nothing sacrosanct about these levels, or for that matter, any levels that we keep hearing about all the time. Yet we keep referring to index levels and feel comfortable with our preference to follow these in our buy sell decisions. That is because the support resistance levels are points which represent the collective decision of the market participants in the past. What is meant is that say at a given level in a rising market a majority of the participants decide to sell. The result of such an action is a market correction and if the correction continues we say the markets faced resistance at that level. Likewise if at a given level in a falling market a majority of market participants decide to buy and market continues to rise we say market found support at that level. Though however markets often make attempts to recover from a correction and even pierce the earlier resistance levels. Such a situation indicates further rise while likewise a breach of support indicates further fall.

What has been mentioned above falls in the realm of 'technical analysis' in stock market parlance. Technical analysis relies on the patterns of previous price movements to predict the future. It believes that if selling was seen at a given level in the past people will sell again whenever the same level is reached at a later date. Many people use it as an aid either alone or in conjunction with other methods to formulate their buy sell decisions. Resistance support levels work if the basis on which buy sell decisions in the past were taken remain unaltered . That is if there were reasons to sell at say 15600 level in the past and the same reasons hold at a subsequent attempt to reach 15600 selling will again be seen. And vise versa, if a support is established, buying will emerge whenever that support is reached in a market fall, as long as market situation don’t change. In such a scenario following technical analysis can be highly rewarding. That however is not always the case, because the world around us is constantly changing and a host of new factors come into play which are quickly taken in by the market. The collective wisdom of the market then decides on whether to stick to the levels or ignore it and continue with the journey.

One could of course say that the markets had gone up substantially and in double quick time that too, and had to pause anyway. True, but at what point? Between 2003 and end 2007 Indian markets witnessed a very strong up trend interspersed with minor corrections . The key indices appreciated to the tune of 700% in a span of 5 years. Only the diehard buy and hold investors who sat through the entire period have handsome multibagers in their hands even now with the massive correction.

So where does it all leave us. How do we figure out whether to stick to the levels indicated by technical analysis or continue to hold on with the position in the light of fresh data points which these days are getting to be enormously complex. Fact is no single approach is going to be sufficient. We have to scalp every bit of information, technical levels being one of these, and attempt to analyze its impact on the market. I shall attempt to deal with these issues in subsequent posts picking up issues prompted by current market situation. This is what I intended to do in this post. Markets reaching significant resistance prompted me to dwell on resistances supports in technical analysis.

Getting back to the market, next week is going to be important for Indian stock markets. Following the expiry of the derivative settlement last thursday market players are expected to take up positions ahead of the presentation of the budget. Annual budgets in India are more than income expenditure statements. They also carry announcements on policy initiatives, thrust areas, priorities of the Government on a host of areas ranging from taxation , fund allocation to social sector initiatives such as education. health, employment generation etc. And as such this annual exercise is looked forward to with extreme eagerness. A great deal of expectation starts to build up. Cross section of interested parties build up wish lists and are presented to the Finance minister.

And this single event is likely to influence market behavior in the near term. Then the 1st quarter results would start coming in. If Government declares its intentions to open up the economy, rationalize taxes, reduce fiscal deficit and make commitments on growth then market sentiment will get another boost. Corporate performance as will be evident from the quarterly numbers will determine whether market deserves another leg up. Otherwise the markets are poised for a period of consolidation or even a correction in the mid term. But from the pre budget noises it seems hopes are high on the Government delivering on its agenda.

Finally monsoon is getting to be a cause for concern. Any anomaly in its progress will have its impact on agriculture which will mean a tempered down growth projection.

Until my next then,

Happy investing