Technical Analysis
Nifty at 6-month ago levels, touches 48K - 4766/'Feb remain crucial price/time zone. The market became bearish, but recovery indicates supportive efforts near 48K level.
Last week’s low at 4766 measures as 545-point or 10% cut from 6th Jan high of 5311. History has shown a minimum cut of 5.5% from initial highs during every ‘Jan.” The 10% drop meets the requirement of this anniversary cycle.
The initial part of Jan is always a crucial time zone. The year-wise % corrections seen from ‘Jan highs are as follows : 9th Jan’2002 : 5.5%, 10th Jan’2003 : 15%, 9th Jan’2004 : 32%, 4th Jan’2005 : 9.5%, 9th Jan’2006 : 5.5%, 4th Jan’2007 : 5.5%, 10th Jan’2008 : 64%, 7th Jan’2009 : 23%.
The 5K-mark is actually the golden mean (mid point for Bull as well as Bear) on Nifty. All previous tops are important technical levels. Holding 50K, therefore, can be considered positive. Remember, Nifty has seen a continuous drop for 8 days since 18th Jan (even the fall during Jan’08 lasted for an exact 8 days). For short term market do reach oversold zone within 8 days. Any positive scenario holding 5K would have potential to test 5100. Failure to hold 5K, on the other hand, could test 4700 and subsequently below 4200.
Look at the time rhythm during post-Jan’08 fall. Nifty was dropping for about 10 weeks, with an average 7 weeks of intervening segments of rally. For the current rally post-Mar’09, the time rhythm shows rallies lasting about 13 weeks, with 3-5 weeks of intervening drops. Thus, a 500-point cut, lasting for 3 to 5 weeks, has been a normal phenomenon during the rally. Anything beyond these parameters would, in other words, be considered abnormal. Based on this very theory, it has been contended that Nifty can remain positive if it holds about 5k by Feb’2010. Despite the best efforts, if Nifty cannot hold on to the 5k level by Feb’10, market is considered bearish.
Going by my 6-month old arguments : (1) the PE ratio is touching maturity level under normal conditions of the market (2) Nifty has doubled from its bottom levels (3) the main buying force, i.e. FII investment, has been generating reducing returns. These arguments have ensured that whatever euphoria we saw in the market was limited only to select individual stocks. Nifty itself has been oscillating around 5000 level for last eight months since Jun’08.
During ‘2004, market had shown a rally similar to what was been during ‘2009, a 115% gains in eight months. Nifty had corrected ‘2004 rally by 60% price-wise in 60% time.
Last two rallies out of major downswings (which saw near-60% erosion in valuation), during ‘2003 and ‘2009. Both rallies are similar in terms of the time consumed and gains registered, both gaining about 115% in about 8 months.
As I have saying, "Will the history repeat itself ? Whether this happens or not, we need to be cautious on this front."
The 1st quarter of every 2nd year has proved a turning point on Nifty. Beginning Jan’1980, most of the turning points can be seen occurring during Jan-Mar period of an even year.
We are now in the 1st quarter of ‘2010, which is an even year, therefore, at a turning point as per this 2-year cycle.
Nifty maturing near 5300 would support my argument that market usually corrects after doubling. Ratio of 200% can be seen even for all the first rallies coming out of bear phases :
- After a 24-month bear phase during 1986-88, Nifty doubled and went into sideways consolidation for about a year before moving further up.
- After a 13-month bear phase during 1992-93, Nifty doubled and went into sideways consolidation for about four years before IT bubble happened in 2000.
- After a 39-month bear phase during 2000-03, Nifty doubled and saw a quick 60% retracement before resuming the bull phase.
Remember, 5300 is about twice the value of Oct’08 low of 2253 or ‘Mar low of 2539.
I also explained my PE Ratio argument previously. I argued, “At its highest level of 5000 on Nifty, PE Ratio had reached 21+, which is near the maximum figure of 22 seen under ‘normal’ circumstances. Only bubbles can push it higher towards 28. Such bubbles happened during ‘2000 and ‘2008, which were 8-year cycle tops. It takes 8 years to build a bubble. Bubbles have never been seen in two consecutive years.” Currently, the PE ratio is at 23+.
The 8-Year Cycle and its implications
The Nifty is assumed to be under a larger 8-year cycle ever since its birth. 1984 was the beginning of 8-year long bull-run till '1992. In Super-Cycle market phase, I have, in fact, taken ‘1984 as the beginning point for the most dynamic bear phase.
The next two important turning points occurred exactly 8 years thereafter, in '1992 and '2000. Both these turning points were marked by stock market scams, because of which the leaders of the rally had extremely difficult time later. For example, ACC, the leading stock of '1992 bull market, remained below its highs till end of '2004. Similarly, the IT stocks, which were leaders of '2000 rally, lost as much as 90% of their top valuations by the year '2003, and most are below their top levels even today.
Last year, we were sitting on this very important cycle, which therefore, threw up similar possibilities. Leader of last bull-market, property stocks now facing extremely difficult time. Most property stocks are mcuh below their top valuations now. Previous bull market Heroes become villains in next bull market cycle.
Zerodha (Trading & Demat Account)
RHP
