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Trading strategies for 'Coalgate' impacted stocks

Devangshu Datta/New Delhi 23 Aug 12 | 12:01 AM

It would be far beyond the scope of this column to even list all the complex issues highlighted by the CAG report on coal block allocations. There are of course, many long-term implications for the energy sector in the fallout from this mess.

What is interesting from the narrow standpoint of the short-term trader is the political outcome. Will the government cancel the coal block allocations? Or, will it weather the storm and maintain status quo? Or, will it come to some compromise? Most extreme of all, will the government fall on this issue?

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There are no obvious answers. The last possibility is extremely unlikely in my opinion and I would count it out. But the other three outcomes are all possible though not equally likely. The impact on the market will be different in each case.

If the government has to cancel coal block allocations, the market will crash, in all likelihood. If the status quo is maintained, there will probably be a relief rally and it will be more pronounced in the directly affected stocks. If some mid-point solution is found, the impact will probably be restricted to the specific stocks affected. Since the deal as it stands is pretty favourable to the recipients of the blocks, any change in terms is likely to be bearish in impact.

The most obviously affected is Reliance Power. Other ADAG group companies will also be impacted by any outcome. Since this is news-based, sentiment could cause a massive swing in either direction. Other potentially affected listed companies (and associated groups) include Tata Power, Jindal Steel and Power, NTPC and perhaps, Coal India. Those stocks in particular, and also Reliance Infra and Reliance Capital are well worth watching.

Pragmatically speaking, there is likely to be a great deal of fuss over the next couple of days before some sort of resolution is reached. There could be excess volatility in these counters with swings in both directions if there is garbled news-flow out of Parliament.

Unfortunately, neither technical analysis nor fundamental analysis will help much in setting targets. The trends will be obvious once there is hard news on the political front. Once a trend starts, it will probably last for a few sessions.

It may be worth fishing in troubled waters if you have strong nerves. Go long if you think the government can brazen it out and maintain status quo. Go short if you think it will be forced to backtrack. Keep margin to spare in either event and set stop-losses.


 

The author is a technical and equity analyst

Sensex

Company Price Gain (%)
Larsen & Toubro1,377.302.48
GAIL (India)384.201.48
B H E L189.301.42
Tata Steel426.601.32
M & M1,036.751.22

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