The Hindu Business Line : Sensex long-term outlook review

If 2007 was the year of the raging bull market, 2008 will go down in history as the year in which the bear charged out from its lair rejuvenated after four years in hibernation.

We had expected a benign correction between 13700 and 21000 at the turn of 2008. This was revised to a more sombre move between 12000 and 16500 in our review on July 6.

In our review in July, we had stated that, “The decline below 13700 brings the next long-term supports for the Sensex at 11,900 (50 per cent retracement of the up-move from 2001) and then 9703 (61.8 per cent retracement) in to focus. We stay with our long-term count that the current down-move is the fourth part of the long-term cycle that began in 1980. The fifth leg (upward) would then take the index beyond 25,000 again. Caveat - decline below 9,703 would need recasting of the counts.

The more difficult question is, how long would this down-trend last? As per Elliott Wave theory, corrections can extend from anywhere between 0.33 to 1.618 times the time consumed by the previous up-move.

The previous up-move lasted four years. That gives us the range between 16 to 77 months. Since the previous long-term correction from 1994 to 2003 was a long-drawn one, applying rules of alteration, the correction this time can be a sharp and swift one that ends in one to one- and- a- half years.”

The above view need not be altered since the Sensex has not yet breached 9700. However, a move below 9700 would mean that the down-move from 21,206 belongs to a correction of larger degree and the downward targets would then get deeper.

Let us consider how far the Sensex can go if it penetrates 9700. The Immediate support below 9700 is the June 2006 trough at 8800.

A 60-percent decline from the 21,206 peak also gives us another support close by, at 8482. If we consider the count from the January peak, one leg of the long-term down trend ended at 12,514 in July and the Sensex was in a corrective up-move between 12,514 and 15,579. The third leg of the down-move that began at 15,579 has the first target at 10207 and the second target at 6887.

Can things get dire enough to take the Sensex to the second target? If the current decline was caused by domestic factors alone, we could have said with reasonable certainty that decline would not extend beyond 8,500. But this fall is a part of a global sell-off in equities.

Many of the Asian markets have retraced more than 60 per cent of their four-year up-moves. Indices in developed markets in US and Europe are close to their 2003 lows.

Viewed against this back-drop, it is extremely difficult to tell how far the current decline can take us.

The good news is that third waves are extremely swift and end in a very short time (after devastating the markets).

So the Sensex should halt this vertical descent soon and there can be a pull back rally or at least a period of sideways movement.

We need to see the end of this October decline before we can form an opinion about the next move of the index.

More Stories on : Stock Markets | Outlook

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page