Sensex Election Volatility

With positive news on the general elections markets are likely to remain bouyant. In the past cycle Sensex rose from a low of 2,600 to 21,200. The Fibonacci levels on the way down were 16,777; 14,100; 11,900; 9,700 and 7,000. These points shall also act as resistance on the way up; but since the market never completed a full retracement to 7,000, the resistance levels on the way up are 12,100; 14,800; 17,000 and 19,200. Since the 12,100 resistance has been tested and broken Sensex could be on its way to 14,800. As it moves up to this level, expect resistance at 12,800; 13,200; 13,500 and 13,800. Over the next 3 months, 14.8k is the top end of the trading range. So if the market gaps up to 14,000 on 18 May, I would not be a buyer because chances are that a retracement to 12,800 is inevitable over the next 3 months.

Events such as the general elections can result in a sentiment driven false break over the Fibonacci level. So risks that we continue in the 9.7k to 12.1k range also exist. In this case the support levels are 11,200; 10,900; 10,600 and 10,300.

My sense tells me that there will be an upward bias to the market because of news and expectation flows; that makes me cautious. Thus my view on market valuations and fundamentals lead to a personal view that the Sensex will test support at 11,200 during the coming 3 months. However, I remain a buyer at index levels of 12.5k-12.8k range and possibly even to 13.5k - there are too many positive catalysts such as a new budget and a new stimulus; ignoring those could be a mistake for the long term, though investing at these levels could lead to short term pain.

My momentum driver calls for a short term market top at 12,800. Followed by a decline to 11,600 followed by a leg up to 14,800. So 14,800 is my year end price target; a target which can very easily been broken once confidence in growth returns - a simple 6% 6 year economic cycle forward growth rate and earnings of 800 will give a valuation of 16,000. Anything significantly beyond this level is unjustified enthusiasm!