Exercise caution as it's time for poll results

Exercise caution as it
Highlights

Benchmark indices clocked impressive performance thanks to two consecutive strong sessions toward the fag end.

Benchmark indices clocked impressive performance thanks to two consecutive strong sessions toward the fag end.

Both Nifty and Sensex gained over 1 per cent each on Friday ahead of Lok Sabha exit poll results.

However, broader indices closed the week with a loss of 0.9 per cent and 2.1 per cent respectively.

Other than Nifty Pharma, Metal, and IT, all the sectoral indices contributed to the strong rally.

On a weekly basis, Nifty Financial (3.2 per cent), FMCG (2.1 per cent), and bank (1.4 per cent) gained the most.

Nifty Pharma (down 5.5 per cent) was the worst performing sector as the drug companies have been facing a lawsuit of conspiring to inflate prices of many commonly used medications in the US.

The rally mainly due to short covering as the event risk is nearing.

The market breadth is not improved and interestingly the index heavyweight Reliance industries was not part of the rally.

Technically, the market tried to come out of the oversold condition before the general election result.

With the last two days upmove, the Nifty closed above the 50EMA and 100EMA but still below the 20MA. The leading indicator RSI took support at 30 and bounced to 48.29.

Historically, the RSI 45 level showed strength and rallied further. Once it reached 60 levels again, the higher on RSI will be formed and will get a confirmation for the continuation of the rally.

As Nifty closed above the 38.2 per cent retracement of recent fall from the top, the next level of resistance is at 11482 and 11570. These levels are important for the market next week.

In 60 minutes chart, the Nifty has broken out of the double bottom pattern. This double bottom pattern target is also incidentally 11,570.

As human emotions will be at the highest level as exit polls and the outcome of the elections is coming out next week, the Nifty may witness at least 600 point volatility.

The India VIX index at 28.07 reached near to the pre-results in 2014 level. As soon as the event is over, it collapsed to the mean level. This time, it will repeat the same scenario, as it is the nature of the volatility.

The available derivative data points out that the maximum pain level is at 11300, which means Nifty may expire at this level on next Thursday, the results day.

But anything can happen as stakes are very high. The evidence is showing that markets are bouncing from the oversold condition after testing the earlier four-month long consolidation breakout point.

As indicators are giving a positive signal with two days gain, the follow-through action is very important to continue the rally. But I would like caution all the traders, as event risk is in place, technical analysis will take back seat.

After the cooling off from the high volatility, the market will certainly take its own path. Traders are advised to apply hedged strategies to protect the capital and do not try to guess the market direction or election outcome.

(The author is a financial journalist and technical analyst. He can be reached at tbchary@gmail.com)

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