On September 18, the US Fed Reserve cut the key interest rate by half percentage point and many Asian markets were reacting sharply to this news.
Has the Indian stock market over reacted to Fed rate cut news? It appears to be so. The following table shows the points/percentage change in various stock exchanges across Asia. It can be seen that Sensex and Hang Seng (Hong Kong) were the maximum beneficiaries. The news made did not make much impact on Taiwan and China’s stock markets.
| Exchange/Index | Points | % Change |
| New York (DJIA) | 335.97 | 2.51 |
| Mumbai (Sensex) | 653.63 | 4.17 |
| Hong Kong (Hang Seng) | 977.79 | 3.98 |
| Osaka (Nikkei) | 579.74 | 3.67 |
| Seoul Composite | 64.04 | 3.48 |
| Singapore (Straight Times) | 116.61 | 3.35 |
| Jakarta Composite | 73.48 | 3.28 |
| Kuala Lampur Composite | 19.83 | 1.55 |
| Karachi 100 | 174.94 | 1.35 |
| Taiwan Weighted | 26.47 | 0.30 |
| Colombo ASPI | (18.29) | (0.01) |
| Shanghai Composite | (29.94) | (0.55) |
AOL India reported that some caution is warranted in the near term. It read:
Sounding a similar cautious note, Arun Kejriwal of Kejriwal Research and Investment Services (KRIS) said, "It is a milestone indeed, but considering the way the market has gained the last 600 to 800 points, it makes us believe that something is wrong somewhere."
In May 2006, US Fed Reserve increased the interest rates for the sixteenth consecutive time by 0.25% to 5.25%. On this occasion, the Sensex lost nearly 31% in just five weeks time. But it went on to break its previous high of 12671 and go past even 16000.
Let us now analyze the daily charts of Nifty and Sensex and try to understand why a cautious approach is needed. Following table shows the points gained/ lost by Nifty and Sensex during the week.
| Date | Nifty | Sensex |
| 17-Sep-07 | -23.35 | -99.37 |
| 18-Sep-07 | 51.55 | 164.69 |
| 19-Sep-07 | 186.15 | 653.63 |
| 20-Sep-07 | 15.20 | 25.20 |
| 21-Sep-07 | 90.00 | 216.28 |
The Nifty closed at 4838, gaining 319.55 points or 7.07% for the week while Sensex closed at 16564, gaining 960.43 points or 6.16%.
In the last week’s review we anticipated correction since profit booking was seen at higher levels. But we did not rule out the possibility of indices going upwards since there were no reversal patterns or signals. As expected, the week started with a corrective decline of 23.35 points. However Nifty had broken its previous resistance at 4648 and closed above it for three days in a row.
Generally, when the market lacks direction i.e. at top and bottom, some “force” or “trigger” may help in deciding further movment. In August, the markets were in overbought condition and the US Sub-prime mortgage crisis acted as a trigger for a quick fall. This time, when everyone was looking for a correction Fed rate cut news made the markets move up higher.
Whatever the reason for this movement may be, now technically the indices have breached their resistances.
In the daily chart, we can see an “ascending triangle” breakout with a triangle height of 646 points. The technical target for this breakout works to 5294.
However, ascending triangle breakouts have a tendency to fall back and test the support levels. This can be seen from the weekly chart shown below.
It can be seen that Nifty, after breaking resistance has tested the support (earlier resistance) and after another upmove has fallen back to close below these levels. Going by this chart, the Nifty may very well fall below 4648 (see daily chart) and that possibility certainly exists. But that decline should only be used as an opportunity to enter Nifty futures.
The last time that Nifty gained more than 7% in a week was 6 years ago, during the week ending April 20, 2001.
In the daily chart of Sensex too, the bullish continuation pattern, ascending triangle breakout has occurred. The triangle height is 2089 and technical target for this breakout is 17958. Watch the huge upward gap on September 19. This long white candle was followed by a doji, indicating indecision among traders about further movement. However, a white (green) candle and positive close has nullified the uncertainty.
Forecast for the next week:
There is a stock market saying: “News based rally seldom survives.” Technically the market has already entered overbought zones; As discussed in the weekly chart, ascending triangles are likely to test their support levels; Nifty has made a high of 4856 (it touched a low of 4002 last month) and gained about 21.3% without any significant correction. Let us now wait for a confirmation next week about the reversal. As I have mentioned in my earlier articles, a confirmation is important while deciding about future price movements.
Abnormal movers during the week:
On September 19, even as indices were soaring to new highs, sugar stocks witnessed heavy buying following an announcement that Government may allow sugar mills to produce ethanol and sell directly. Sree Renuka Sugars gained 24.16% during a single trading session.
On September 21, Reliance Natural Resources (RNRL) gained 35.30% and 209 million shares got traded. The market speculated that the company is getting into gas distribution. Technically it broke its resistance at 41.65 during July 2007.
Advance / Decline Ratio:
| Date | Adv. | Dec. | Unch. |
| 17-Sep-07 | 539 | 583 | 28 |
| 18-Sep-07 | 782 | 346 | 25 |
| 19-Sep-07 | 679 | 453 | 25 |
| 20-Sep-07 | 453 | 667 | 32 |
| 21-Sep-07 | 467 | 668 | 21 |
Inspite of Nifty gaining 90 points on Friday, 57.8% of stocks ended up as losers.
Top Gainers / Losers among Index stocks:
| Scrip | % Gain | Scrip | % Loss |
| RPL | 18.55 | SATYAMCOMP | 2.73 |
| REL | 14.33 | CIPLA | 2.70 |
| GAIL | 13.37 | WIPRO | 2.57 |
| SAIL | 12.44 | SUNPHARMA | 2.40 |
| RELIANCE | 12.08 | RANBAXY | 2.14 |
Top Gainers / Losers in overall market:
| Scrip | % Gain | Scrip | % Loss |
| STCINDIA | 75.08 | SUBEX | 17.23 |
| RIIL | 74.21 | TORNTPHARM | 10.62 |
| RNRL | 51.43 | AFTEK | 10.07 |
| WALCHANNAG | 51.09 | KPIT | 10.04 |
| UNIENTER | 48.19 | LOTTEINDIA | 9.16 |