Technical Analysis

Index outlook 2020: Sensex and Nifty 50 to stay volatile

Lokeshwarri S K | Updated on January 08, 2020 Published on January 04, 2020

They ended 2019 at life-time highs. A correction is, therefore, around the corner

The Sensex and the Nifty 50 continued their Indian rope trick in 2019. Even as the economy slowed and corporate earnings stuttered; the Sensex gained 15 per cent and the Nifty 50, 12 per cent. The mid- and small-cap indices, however, reflected the pain in the broader listed stock universe, ending the year with losses.

In the ‘Index Outlook for 2019’, BusinessLine had written about the difficulty in analysing the bellwether indice movements due to excessive liquidity distorting market corrections. This trend was accentuated in 2019.

To understand the changes in the factors driving large-cap indices, we need to study the movement of other global benchmarks as well. Equity indices representing developed markets outdid other market indices in 2019. The Dow Jones Industrial Average gained 23 per cent in 2019, DJ Euro Stoxx 50, 25 per cent and Nikkei 18 per cent. This is a reverse of the situation towards the end of 2018, when all developed market indices were on the verge of plunging into a long-term correction.

So, what changed in 2019? The US Federal Reserve stopped its monetary tightening --halted its interest rate hikes in the first half of 2019 and then cut rates by 75 basis points after June 2019. It also resumed bond purchases in October 2019. The Fed’s actions seem largely responsible for the fresh leg of the rally in many markets, including India. It needs to be remembered that over 45 per cent of global investible funds originate from the US and FPIs from the US account for about one-third of the total FPI inflows in to India.

The trouble is that the entire global economy is appearing as fragile as a house of cards. The trade war is already hurting growth and a concrete deal appears difficult as of now. Growth in the US is slowing and valuation premium of US equity versus rest of the world is at the highest ever. Germany is threatening to go into recession and growth in China is also slowing below 6 per cent. Geo-political tensions and a spike in crude oil prices threaten to derail growth further.

The stock market rally is at odds with ground reality. Yet, no one seems to know how long this liquidity driven rally will continue or how and when it will end.


We stay with the view outlined in the previous yearly outlooks that a new long-term cycle began, post the global financial crisis, from the low formed at 2,539 in March 2009 in the Nifty 50 and from 8,047 in the Sensex.

If we consider the long-term charts of the global benchmarks such as S&P 500, DAX, Nikkei and Nasdaq 100, a clear-cut five-wave formation was completed in October 2018 and a long-term correction seems to have begun from there. If the rally in 2019, in these indices, is part of the correction that began in October 2018, then there could be another leg lower in 2020, taking them back to the 2018 lows. But the liquidity in global markets makes a severe bear market highly unlikely, at least over the next year.

If we apply the trend in other global indices on Indian benchmarks, a five-wave impulse move could be complete in the Nifty 50 and Sensex at the October 2018 peak too. The move that followed this peak appears to be a running correction where higher peaks are formed due to excessive demand. The assumption that the impulse wave from 2009 could have been completed in 2018 is fortified by the fact that the Nifty Midcap 100 and the Nifty Smallcap 100 are down more than 30 per cent since last year.

Where do we go from here? We will have to work with two assumptions for 2020 as explained below:

Scenario 1:

After the completion of an impulse wave from 2009-low, the market is currently in a long-term running correction. That is, there will be volatility as the index moves within a range with a bullish bias.

The range for the Nifty 50 could be between 10,600 and 13,000. In Sensex, the range could be between 36,000 and 43,000.

Since the up-move from 2009 consumed nine years (2009-2018), the ongoing correction should last at least three years, up to 2021. If the correction period is 61.8 per cent of the up-move, it could go on until 2023.

But there would be another very strong structural up-move after this corrective phase ends, which could take Sensex to six digits. This will be possible if the above mentioned supports are not breached.

Scenario 2:

The more bearish scenario is that the ongoing consolidation is a distribution phase terminating the impulse wave from 2009. In other words, the 5th from 2009-low is yet to be completed. This scenario will be validated if the Nifty 50 declines below 10,600 and the Sensex below 35,000.

This will mean that a sharp and deep correction will ensue that drags the Nifty 50 to 8,500 and the Sensex to 29,000. We will look at subsequent targets if the indices go in to a tailspin next year.


The first scenario appears more likely, this year. Given the upcoming US Presidential election in 2020 and the tendency of President Trump to use the US stock market rally as a validation of his Presidential term; he is unlikely to let US market correct too severely and will ensure that the liquidity tap is kept gushing in 2020. The bellwether indices in Indian markets are also unlikely to decline more than 10-15 per cent, this year, as FPI flows are likely to continue. That said, the correction in mid- and small-cap stocks can exacerbate if global risk aversion increases.

The year ahead

The Sensex and the Nifty 50 have begun 2020 at life-time peaks, following strong rally in 2019, backed by poor fundamentals. Also most global indices are in the ‘B’ wave of a sideways correction. The US-Iran tension and crude oil spike is the perfect recipe to trigger the ‘C’ wave in global benchmarks that takes them lower to their 2018-lows. Even if the situation in Iran is doused, there is a strong possibility of a global correction of at least 10 per cent, after the rally extends a little further.

The Nifty 50

As explained earlier, we are revising our medium-term counts to assume a long-term sideways consolidation since the August 2018 peak.

If this is a 3-3-3-3-3 triangle, the ‘D’ wave is currently in motion that has the targets of 11,804 and 12,506. The Nifty 50 can move a little higher from here towards the second target, prior to the Union Budget, following which the ‘E’ wave of the triangle can drag it lower to 11,000 level. In other words, the range for the Nifty 50 could narrow between 12,600 and 11,000, at least in the first half of 2020.

Target above 12,600 is 13,207. Below 11,000, 10,600 and 10,000 will be the critical supports. The long-term view will be roiled only on close below 10,600.


The wave count is similar in Sensex. The target of the ‘D’ wave of the triangle are 39,816 and 42,183. The Sensex therefore appears closer to the top of its ‘D’ wave. The ‘E’ wave lower has the targets of 38,000 and then 36,000. The likely range for the Sensex for 2020, is therefore between 42,000 and 36,000. Upper limit is 47,200 and the lower limit is 33,300.

Long-term uptrend will be under threat only if the Sensex closes below 36,000.

This analysis is based on Elliott wave principles and seeks to provide guide-posts that help in making investment and trading decisions over the year.

BusinessLine will revisit the long-term counts, should the need arise, over the course of 2020.

Published on January 04, 2020
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