Be Careful this week - It could be a turning point again...

A lot of things which we mentioned during last week came true:

1. We said that the Budget would be largely a Non-Event. And the fiscal discipline and fiscal deficit targets at 4.80% or lower will be stressed upon. Our finance minister actually has put the next fiscal deficit target of 4.60%...

2. In fact, the rally in the markets from the budget day was largely attributed to Banking Sector which started a sharp rally after the FM mentioned the fiscal deficit target of 4.60%.

3. We said, we are more bullish than bearish with the caution that if the Nifty levels of 5160-5260 breaks, we might see an immediate downside of another 400 points. We were anticipating the Nifty Targets of 5440-5490 and Bank Nifty Targets of 10,900 (When the Nifty was 5313 and Bank Nifty was 10,450).
To our surprise, the Nifty went up all the way to 5611 and Bank Nifty to 11,155 ! This, inspite of Crude Oil Shock and Libyan Crisis.

However, the week closed very close to our targets. Nifty closed at 5535 and Bank Nifty at 10,960.


Now what next...
Quick Macro:

• Libyan Crisis have been worsening. When we wrote this last week, Crude was at 97-99. We were anticipating the crude to cool down to 95 levels. But it swiftly moved up and currently at around 105 levels. US has announced an attack on Libya to oust the dictator.
• ECB (European Central Bank) president Jaun Claude Trichet has expressed his willingness to increase interest rates in April, to fight inflation.
• And the latest one is - DMK has pulled the support and theoratically, UPA government has lost the majority.

Analysis:

• Directionally, now everyone has started factoring higher crude oil prices through out the Calendar year 2011. Some analysts have started building a worst case scenario with Crude at 120-130 for entire year. Crude Singly has the ability to distort India's Growth and Future Prospects. It puts pressure on Rupee through Current Account Deficit and puts pressure on Interest Rates through indirectly pushing up the Fiscal Deficit of Indian Govt (through subsidies). If the Govt. decides to pass on the cost to consumer, it would immediately spike the inflation.
• So, "Crude not showing any sign of weakness" is going to be big trouble maker for Indian Markets. And the Banks will start becoming extremely vulnerable with this.
• ECB's stance of increasing Interest Rates in April by 0.25% doesnt affect us directly. But it more or less confirms that RBI will have to increase the interest rates in this policy meeting. So, the chances of avoiding the rise due to slower growth (IIP numbers) during December, January and February has gone.
• There is one more serious implication of ECB's rate increase. It can distort the recovery path of PIGGS countries which were facing soveriegn crisis during 2010. Those stories can come back in May & June this year again. And that should be a potential trigger for the Western Markets to fall again.
• Domestic News of DMK pulling the support is not shocking. It was largely anticipated since the 2G scam came out and Congress passively participated in Raja's exit. I dont think it would become so worst that we will have to see Election Again.
• HOWEVER, THIS CAN BE THE CENTRE STORY FOR SPECULATION DURING NEXT FEW WEEKS. The school which believes that this would cause a big uncertainties in Indian markets will start pulling out the funds and that can take the markets to much lower levels.

How does Micro Set Up looks like:

• Nifty for whatever reason, if opens and trades below the Friday's closing, has a potential to lose good 200 points and straight away, go to 5300-5350 range, where the weekly support is placed.
• If this support breaks it would open the possibility to retest 5175 and go down even lower.
• ALTERNATIVELY, It may happen that when we are close to the support levels of 5300-5350, we may see important macro or domestic news which will finally decide whether the support breaks or acts as a strong support.
• However, one needs to be very cautious as this is going to be 5th week from the bottom and it can be a turning point again. With no "Good News in Sight" and only incremental bad news coming, the set up becomes weak. The odds are in favor of Bears right now, with the only possibility of rescue that if something really good comes out by Tuesday-Wednesday like Crude going back below 95 or some alternative to the Libyan deadlock or some international good news.
• In such scenario where the markets react positively to the good news and start moving up from the levels of 5350 support, the next week we can close at 5700 on Nifty.
• Similar levels in Bank Nifty are: Support at 10,570 to 10,310 levels. If breaks forcefully, we can go down all the way to 9500 levels in coming days.
• Alternatively, if we get really a good news, and there is a turning point from 10500 kind of levels, we may see Bank Nifty close near 11,200-11,400.

Whatever be the case - Up or Down, this week we will have large movements either on upside or downside with good volumes. And once we are through with this week, we will see the final medium term direction of the market.