Budget 2011: 5125-5175 is a critical band

The markets have reacted with a positive bias to the finance minister’s speech. But the charts seem to indicate that the upthrust was more due to the absence of bad news rather than presence of concrete market friendly measure.

To that extent, bear-covering seems to have played a dominant part in the budget-day upmove.

In terms of hard numbers, I feel 5600 level will be a significant resistance on the upside on the Nifty spot and unless this level is overcome forcefully, the bulls seem to be on the ropes. Technical studies seem to indicate the smart money has continued to exit long positions and the outlook in the near / medium term remains that of concern.

Since the bears have not exhausted their entire open interest trade book, there will be some upmoves as shorts are covered and the immediate support on the Nifty will be at 5125-5175 where the recent turning point was in February.

Should this level be violated, 4900 could be a possibility. That decline is expected to be faster and sharper than the fall to 5125-5175 band. Some relief rally may just occur after the 4900 level is hit.

If the flip side possibilities are to become a reality and the market men cheer the budget and choose to take the markets higher, it is critical that the Nifty spot remains above 5300, especially on a closing basis and declines are on lower volumes and rallies be accompanied by higher volumes.

The recent slide has shown volumes to escalate on declining days and this smells of distribution of paper by the smart money. Any upthrust in the coming days must be taken seriously, must see robust volumes or be used to exit longs.

The 5600 level will be the first milestone hurdle for bulls. In the unlikely event of this being overcome, a minute possibility of 5800 may exist. I would suggest partial unwinding at 5600 levels and should the far-fetched level of 5800 become a reality, significant reduction in high beta stocks from your investment portfolio.

Investors looking for fresh buying opportunities may await some declines before deploying cash in the markets and that too only on those stocks where the relative strength comparative vis-a-vis the Nifty is extremely high and beta is possibly lower than 0.75. Also look at alternate asset classes such as ETFs, e-commodities and fixed-income avenues.

Vijay L Bhambwani is CEO, BSPLIndia.com