Most analysts on the Street agree on Monday’s rise of 200 points in the Sensex is only a temporary pullback, as fundamental factors still worry investors. This, however, has not stopped them predicting a significant rise in the indices in the near future.
Technical analysts across brokerages feel the benchmark indices are currently trading at strong support levels and some amount of value-buying would emerge. Three domestic entities — Edelweiss Financial Services, Angel Broking and Emkay Global Financial — are bullish on the near-term movement of Indian indices.
The 50-share Nifty of the National Stock Exchange will be supported at the 4,777.74 level, a 38.2 per cent retracement from its November 5 high of 6,338.50, and rebound to 5,200 to create a shoulder in a so-called head-and-shoulders pattern, Tejas Shah, technical analyst at Edelweiss, said in a telephone interview to Bloomberg. The Nifty gained 1.1 per cent or 53.15 points on Monday, to close at 4,898.80. In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.
“There is carnage in the street,” said Shardul Kulkarni, an analyst with Angel Broking who correctly predicted in June a 14 per cent decline in the index.
“The Nifty is looking oversold on the charts.” It is likely to test 5,050 or even 5,200 in the next few days before the downtrend resumes, he added.
Emkay Global, meanwhile, feels the Nifty is “critically poised” around the 4,700-4,800 support range and could result in a bounce. “The quality of the bounce would give us further cues. The overall setups, though, look weak and we expect selling to intensify once again around the 5,000-5,150 levels,” adds the brokerage.
The 30-share Sensex of the Bombay Stock Exchange has lost 21 per cent this year, the worst performer after Brazil’s Bovespa Index among benchmark gauges in the world’s 10 biggest markets, on concern that higher borrowing costs will slow economic growth and erode earnings. Companies in the Sensex are valued at 13.4 times estimated earnings, compared with a multiple of 9.6 for the MSCI Emerging Markets Index.
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Stocks have fallen in the past month on concern the US economic recovery is faltering and Europe’s debt crisis will worsen. The Sensex posted its fourth straight week of losses last week, the longest losing streak since October 2008, when the collapse of Lehman Brothers Holdings Inc froze credit markets.
The highest peak, or ‘head’, was formed after the Nifty rose to 6,338 on November 5, Angel’s Kulkarni said. The ‘left shoulder’ took shape between February and May 2010, with the index moving from 4,675 to 4,786. The measure has completed the ‘right shoulder’ by falling below the neckline at 5,300 and moving to 4,800, he said.
A head-and-shoulders chart pattern occurs when a price forms three consecutive peaks or valleys, the middle being the largest. A breach of the neckline connecting the base of the three peaks signals a possible bearish trend.