Sentiment is quite downbeat as we begin 2016, with both the benchmarks, the Sensex and the Nifty, delivering mild losses. The disappointment with the new Narendra Modi government, coupled with tough domestic and external environments, are taking a toll on corporate earnings. The question that is now being asked is, “Is this the end of the bull market?”
The answer is no; we are currently in a corrective phase within a long-term bull market. And most probably, we are quite close to the lowest point of this correction. But even if indices dip further, it will be a buying opportunity from a long-term perspective.
The benchmarks have followed this script quite closely and now we are close to the lower end of this trading band. Doubts and misgivings always tend to run high close to market bottoms.
Long-term wave analysis
This analysis is based on Elliott wave principles. Our reading of the movement of the Sensex and the Nifty based on these principles are as follows:
The ongoing structural bull market has been in force since 2001. One wave (phase) of this uptrend ended at the 2008 peak. The decline in 2008 corrected over two-thirds of the previous upmove and hence qualifies as the second wave.
The third wave of this structural bull market is unfolding since the March 2009 low. The minimum target for the third wave in the Sensex falls between 37,000 and 42,000. The corresponding levels in the Nifty are between 11,000 and 12,000. The upper targets exceed 70,000 on the Sensex and 19,000 on the Nifty.
Key long-term support that needs to hold, in order to retain the positive long-term outlook are, 21,000 on the Sensex and 6,300 on the Nifty. The assumptions we have used to arrive at the above targets will have to be re-cast only if these long-term supports are breached.
Where are we now?
We appear to be entering a long-drawn corrective phase, similar to the one witnessed between October 2010 and August 2013. These corrective wave patterns can get quite complex and drag on for many years.
The Sensex has very important medium as well as long-term support in the zone between 24,600 and 25,300. The corresponding levels for the Nifty are between 7,350 and 7,600.
It is heartening that these levels were not breached even as the Fed pushed through its first rate hike. As long as these levels hold, the two benchmarks are likely to trade in a broad range over the next year. The band for the Sensex next year could be between 25,000 and 30,000 and for the Nifty, between 7,500 and 9,000. In short, the benchmarks could be range-bound in 2016 with sporadic rallies.
Do not expect too many wonderful flourishes in 2016. It could well turn out to be a boring period for large-caps as they plod sideways.
The greater action could be beyond the benchmarks; in the mid-cap space.
If the going gets tough, resulting in the breach of the floor of the band, the Sensex could decline up to 22,300. Support for the Nifty will be at 6,700.
The upper limit for the Sensex will be 32,000 and for the Nifty 9,600. We will review these targets if the limits are breached.
The week ahead
For those who wish to know the weekly trading levels, here’s a brief.
Nifty: The Nifty managed to close in the green for the third consecutive week. The double-bottom on the weekly chart is a positive.
Close above the 50-day moving average is also a good sign. Indicators on both daily and weekly charts are signalling that the uptrend can continue, at least for some more time.
Supports for the week are at 7,800 and 7,700. Traders can buy on declines as long as the index trades above 7,800.
Immediate resistance is at 7,979. Once this level is crossed, the Nifty can go on to 8,150 or 8,200.
Sensex: The Sensex is currently halting just below its 50-day moving average.
Weakness in the early part of the week can drag the index lower to 25,674 or 25,369.
Reversal from the first support should be viewed as a buying opportunity. Targets for the week are 26,249 and 26,715.
Bank Nifty: The Bank Nifty too managed to make progress last week.
Important short-term targets for the index are 17,175 and 17,337. Medium-term outlook for the index will turn positive on a move above 17,337, paving the way for a rise to 17,606 and then to 18,000.
Traders can hold their long positions as long as the index trades above 16,700.
Decline below the level of 16,500 will make the short-term view negative.