Tuesday Trade Setup: Though Up-moves Likely; Markets Need To Be Approached With Sanity
In what can be termed as a very strong and unprecedented reaction to the exit polls, the Indian equity markets saw a gap up opening, got stronger towards the end and gave a fresh lifetime high on a closing basis. The equity markets reacted to the exit polls as if they are actually the general elections results and showed reactions which can even be called irrational to some extent. The headline index NIFTY ended the day with a strong gain of 421.10 points or 3.69%.
The strong government back at the center is certainly a big positive for the markets. Having said this, at the cost of sounding a pessimist, we would suggest taking a slightly different view of the situation. To begin with, looking at the behavior today, it seemed like markets forgot that these are exit polls and not the actual results of the general elections. Importantly, apart from the fact that exit polls are never accurate, the big question that arises is – if markets reacted this much to the exit polls itself, there is nothing much left to react when actual results come out on May 23. A positive reaction was expected for sure but the quantum of such reaction puts a big question mark on the sustainability of such a move.
In the past three sessions, the NIFTY has risen nearly 700 points. Apart from this, the lifetime high level of 11856 is yet to be taken out. The behavior of NIFTY against this price level is extremely important to watch. Going further, given the quantum of reaction that the markets gave to the exit polls, it has once again taken itself to valuations which are not justifiable, technically or otherwise. The macro-economical, global and macro-technical tailwinds still continue to very much exist.
Tuesday may see a positive opening and some follow up moves may not be ruled out. The levels of 11860 and 11935 are likely immediate resistance points for the markets. However, given the overall structure of the charts, we strongly feel that such momentum should not be mindlessly chased. There two more days to go until the general election results actually come out and until then or thereafter, there are very high chances that some profit taking might be seen.
For anyone who is long in such markets over the past couple of days, the markets have presented excellent opportunity to take profits home. It is recommended that rather than giving a mindless chase to the momentum, money should be taken off the table and one much wait until the markets actually see the results and digest it fully after coming days. The present up-move has given an excellent opportunity to the investors to take profits home and create liquidity which may be later used to rebalance their portfolios. The markets should be approached with a sane mind over the coming days.
Milan Vaishnav, CMT, MSTA, Consulting Technical Analyst Member: (CMT Association, USA / CSTA, Canada / STA, UK) | (Research Analyst, SEBI Reg. No. INH000003341)