#MarketUpdate- Prelims cracked, Merit Class, BUT ! ! !

Hi All,

Bang on.... The age old Dow Theory Principal, Proven right, yet again....

Price discounts everything

As discussed in the earlier post of Friday, markets gaped up by more than 2%  and seems to have, to an extent, factored in a probable outcome of the verdict on 23 May, which is ideally expected to be close to the Exit Polls announced yesterday. Good part is indices are sustaining the upward leap and trading up by close to 4% now and trading a hit away from the life high.

I feel, following scenarios to unfold in the near future -

1. Markets have factored in the NDA's majority and return to power with close to 5 -6% gains on Friday and today
2. Any further leap by NDA above the tally of exit polls (Close to or above 300 seats) would mean another reason to cheer for markets and we can expect a fresh northward move on 23 or 24 May which might breach the life high for Nifty of 11760
3. Moreover, a clear single handed majority for BJP on its own, would be very much welcome by bulls and enough to take Nifty near 12k mark or even higher
4. Remotely probable scenario, (buy can't be ruled out, especially after lat week's Australian exit polls and another cases like 2004 elections exit pools went completely wrong Read : exit polls going completely or partially wrong) of exit polls getting it wrong completely (like 2004 elections) and BJP gets less than 170-180 seats and hence NDA may not be in a position to form the government and UPA with other MGM allies forms government, this would be a severe shock to the markets and we can expect a huge sell off, something even closer or similar to that of 2004 where markets plummeted by approx 20% in days after the verdict. In this scenario 10500-10000-9500 becomes visible, but predicting the actual damage may be next impossible. 
5. Less probable  outcome where the final tally is lesser than exit polls expectation numbers but BJP and NDA manages to somehow maintain the majority, where BJP gets somewhere between 200-220 seats and other allies gets required seats (and with a bit of horse trading), markets might give up some of the gains of these 2 days, and might settle above 11k mark

All said and done, in past 2 sessions, markets yet again proved that it discounts everything, there is also one other, equally meaningful principal, which says 

Buy the Rumour sell the Fact....

Basis this, I personally feel, even if the verdict is close enough to the exit polls and BJP wins with a thumping majority, this rally might not sustain, and before the markets decide the next course of action, there should be a serious and aggressive  profit booking post the event. 

Not only that, after the exit poll resulsts, there might be a chance that the Nifty might kiss the all time high, but even for tomorrow / day after (before the verdict and post the exit poll) it may not hold on to today's gains and might trade sideways between 11500-11900

For trading, a simple rule can be, since markets are trading near a resistance zone of life high, the risk reward favors a short position, if someone dares (and one should dare too) should be with a stop loss above the life high but Traders are advised to trade with caution...

Investors, should really not worry as the exit polls are not indicating any price shocks after the verdict, but if the scenario 4 or 5, gets played out, they should definitely protect their portfolios at negligible costs. Please read - Portfolio Insurance