We present possible index levels for a good,a bad or an ugly Budget

The Big week for the stock market is finally here. The Sensex and the Nifty are placed at uncomfortable heights of 25,962 and 7,752. But short-term momentum continues to be good and there is a strong likelihood of the indices moving a little higher from these levels in the sessions prior to the Budget.

So what should you do during this period? If you are a short-term investor or trader, take some money off the table in the sessions preceding the Budget day. If you are an investor, wait out this week before deciding on any fresh investments. Rationality takes a back-seat in the run-up to the D-day and on the Budget day. Even if you risk losing a few hundred points on the Nifty, it will be better for your blood pressure to watch the Budget jamboree from the sidelines.

It was party time for equity markets last week; not just in Dalal Street but in Wall Street too. The Sensex stopped a hair’s breadth of a distance short of 26,000 at 25,999 and the Dow Jones Industrial Average managed to move above 17,000, for the first time in its history.

While strong US jobs data and improving economy helped Wall Street, Indian stocks were flying on a wing and a prayer. It was the hope of a miraculous Budget that made Indian investors go wild last week, throwing caution to the wind. Despite the many ifs and buts surrounding the ability of the Finance Minister to dole out sops in the Budget, investors appeared convinced that there will be another leg of the rally after the Budget.

Oscillators in the daily Sensex and Nifty chart are indicating that the short-term trend is gaining strength and can take the indices higher from these levels. The rate of change oscillator in the daily chart has just cut into the positive zone. Moving average convergence divergence oscillator too is signalling a buy, implying positive short-term view. Weekly oscillators are however in the overbought zone and are moving sideways there. While there is no sell-signal yet, the medium-term trend could be on the verge of running its course.

Sensex (25,962)

The Sensex has rallied 862 points to end at a fresh closing high. As mentioned above, this is a big week for the market. Here are three scenarios that can pan out after the Budget.

A goldilocks Budget: If Jaitley delivers a not-too-good-not-too-bad kind of a Budget, there can be a small post-budget rally that takes the Sensex to 26,419 or 26,788. The Sensex will most likely reverse after an initial spurt and spend some time moving lower towards 25,000 or so.

A block-buster budget: If the market gets over enthusiastic about the Budget and there is a raging rally on the Budget day, then the Sensex will zip past the 27,000 level and we could even see 27,969 over the next few weeks.

A disappointing budget: If there are some ugly surprises that the FM springs on the market and India Inc that make investors (read foreign investors) furious, they can dump stock causing a deep gash to 24,415 or 23,712.

Chart patterns so far are indicating a running correction that is very bullish. Short-term traders can therefore hold their long positions with stop loss at 24,850. Unless there is a strong close below this level in the early part of the week, the short-term trend will remain up.

Investors need to stop making fresh purchases on a close below 23,600. Medium-term trend will not be threatened unless the Sensex closes below 22,340.

Nifty (7,751.6)

The Nifty too closed at a new life-time high last week. Here are the guide-posts for the Nifty.

A goldilocks budget: If the Budget leaves investors cold, there can be a small spurt to 7,913 or so, that can fizzle out thereafter, causing a fall to 7,440 or 7,318.

A block-buster budget: If investors get too bullish after the Budget, the rally can take the Nifty up to 8,000 levels. This could happen over the next two or three weeks.

A disappointing budget: If investors do not like what is dished out to them on Thursday, there could be a fall to 7,000 levels.

Investors can hold their horses as long as the index trades above this level. They need to start selling only if this level is breached.

Short-term trend is quite positive implying that the rally could continue up to the Budget day. Short-term investors with a large risk appetite can play long with stop loss at 7,310. Stop-loss for medium term investors can be placed at 7,000.

The week ahead will help us decide on the medium-term trajectory of the market.

Global cues

It was a strong week for global markets with most indices closing with gains. CBOE volatility index dipped to close almost 9 per cent lower for the week.

The highlight of the week was the strong surge in Dow on Friday that took it past the 17,000 mark.

Unless the index does a volte-face and closes below 17,000 again next week, we can see the index moving higher to 17,375 in the upcoming sessions.

The short-term trend will be threatened only if the index closes below 16,740 in the ensuing weeks.

(This article was published on July 5, 2014)
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