20DMA hovering in uptrend
Nifty is at a new lifetime high, above the prior pivot and trading above all key long-term moving averages; Only concern is the decline in volume, breadth; Be cautious about the directional bias before the election outcome
Another buoyant and impulsive week ended with over two per cent gains for the second straight week. NSE Nifty traded in the 621.85 points and ended with 455.1 points or 2.02 per cent gain. BSE Sensex also gained by 2.02 per cent. The broader market indices, Nifty Midcap-100 and Smallcap-100, advanced by 0.07 per cent and 1.0 per cent. All sectoral indices closed higher during last week. The Media index is the top gainer with 4.7 per cent. The Metal and PSU Bank indices gained by 3.9 per cent and 3.5 per cent, respectively. The market breadth is almost neutral last week. The India VIX is up by 5.88 per cent to 21.71. It touched the 24.21 on Thursday. The FIIs sold Rs34,459.88-crore worth equities, and the DIIs bought 40,797.89 crore worth of stocks this month.
Last week, the Nifty achieved a significant milestone, scaling a new lifetime high at 23,026.40 points. This is a strong indicator of the market’s positive sentiment and suggests a low probability of a change in the government. The market had already factored in the pre-election rally, and the Nifty’s surge after the RBI’s dividend announcement further boosted sentiments. The economists expected that the fiscal consolidation would improve. Soon after the RBI’s dividend announcement, the Nifty rallied 370 points on Thursday.
As we look ahead, the immediate question is how much upside potential remains for the Nifty? The immediate resistance is at 23,155, which coincides with the rising channel’s resistance. The Nifty could reach this target before the exit polls. The exit poll data will be available on the 1st and 2nd of June. The market will then have to respond to the exit polls on the 3rd of June, a crucial event that could significantly influence market direction.
In the bull case scenario, the ruling BJP or the NDA surpasses the 2019 seats, which means 303 and 353, respectively, will be a positive sign for the market. In this scenario, the market will test the 22,300-22,500 zone of resistance. As the slogan’s target of 400 seats is achieved, even for NDA, the market will see a knee-jerk reaction that can test anywhere in the zone of 23,500-23,900. This means the upside target is 3.9 to 4 per cent. But in any case, if the results are not up to the expectation, or there is a decline in the number of seats, even though the NDA forms a government, then the market will decline by at least 10 per cent. This means it will retrace 50 per cent of the current uptrend, which began in October 2023. In the most bear case scenario, the Nifty may test on the 1st December 2023, a high of 20,291 points, and fill the huge gap. It is almost 61.8 per cent retracement level (20,437pts).
During major event risks like General Elections Day, the market reacts impulsively. However, it’s important to remember the first principle of Charles Dow’s Theory- the market discounts everything. This means that all the information about a company or, an industry or external risk, is already reflected in the stock price. As stated above, the market already discounted the outcome. The VIX is at 21.71, which indicates higher volatility, which means the Nifty can move 4.65 per cent on either side.
The market has yet to undergo major correction after November 2022 - March 2023. The Nifty declined by 10.90 per cent. After this, there was a minor correction of 6.72 per cent during Sep-October 2023. So expect, Buy on rumors and sell on news kind of a scenario. As mentioned earlier, any disappointment in any aspect of the government composition will affect the market sentiments. Even after the NDA government forms the government with an expected majority, the market will witness a profit booking and correct after a week or ten days. Later the General Budget will be the trigger point for the market. Any correction up to 10 per cent from the high will open plenty of opportunities. The target for the Nifty 26,276 is intact and can be achieved in 18-24 months.
The Nifty is at a new lifetime high, above the prior pivot and trading above all key long-term moving averages. During the last week, on all trading days, it was able to close above the open and formed a bullish candle. The 20DMA is in uptrend. The only concern is the decline in volume, breadth, and Friday’s Shooting Star kind of candle. Let us be cautious about the directional bias before the election outcome.
(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)