Market rise likely till general election

The major Indian indices are up 33 per cent in the past two years and six per cent in the past 12 months in terms of rupee-denominated returns. The market is also in an uptrend, having hit an all-time high on December 9. Where does one expect the market to head in 2014? In making projections, one should consider variables such as pure technical parameters, the attitude of major participants such as foreign institutional investors (FIIs) and domestic institutional investors (DIIs), and the political situation.

In purely technical chart-based analysis, the market is in a bull-run, which might get stronger. The Nifty and Sensex have hit recent all-time highs. Accurate target projection is difficult; the indices may soon be in new territory with no historical benchmarks. Levels of 7,000-plus Nifty are quite possible and 15-20 per cent climb could take it till 7,500 or beyond.

Trend-following systems indicate staying long, with a trailing stop-loss. For a long-term positional trader, that stop-loss could be somewhere just below the value of the 200 day moving average, or DMA, (roughly Nifty 5,900) or the three-month low (about 5,965). If the market moves up, the stop-loss would be pushed up. It is impossible on the basis of pure technicals to judge how long this long-term bull market could last.

On the downside, the 200-DMA is generally a benchmark of sentiment; if the market trades below the 200-DMA, the trend is reckoned bearish and vice-versa. However, the market trend has dipped below the 200-DMA several times in the past 18 months and it has always recovered inside two months.

There has been a lot of trading between 5,600 and 5,900 levels. Tentatively, one would consider a fall below 200-DMA a bearish signal and a drop below 5,600 (a five per cent downside penetration of the 200 -DMA) as confirmation of a new bear market.

Will FIIs maintain their bullish attitude to India? A related question is will the DIIs reverse their bearish attitude or maintain it? The answers will depend on politics. A stable majority in the elections might mean an accelerated uptrend, unexpected election results such as in May 2004 may result in a massive short-term crash. If the Bharatiya Janata Party doesn't get a stable majority, there will be a steep correction.

If Parliament is hung, or the United Progressive Alliance retains power (it seems unlikely but you never know), the trend could reverse into a long-term bear market. Taking everything into consideration, I would expect the market to trend up until the general elections. The election results could intensify the uptrend or trigger a full-scale reversal. The upside could, in perfect circumstances, result in a 20 per cent gain or more. The downside could be 30 per cent or more.

The author is a technical and equity analyst