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Research:
An Analysis of Nifty

19th March, 2014
Nifty 6524

An Analysis of Nifty from a Historical Perspective

The current stock market scenario is one of the most fragmented in the last 30 years. Just think of it, even though the Nifty is scaling a life-time high above 6500, the sectoral indices are not following suit. The Bank Nifty needs to rise by 9% and the CNX Midcap by 20% to make new highs. The CNX Defty needs to rise by a mammoth 34% just to cross the 2010 high and 17% more to make a new life high!

So, is this a new bull market? Or not?

EXECUTIVE SUMMARY
Although there are risks associated with the current upmove in the Nifty (especially from the global market and from the possibility of a hung parliament in India), and although this is not a roaring, secular bull market, the study of historical Time-and-Price patterns below suggests there is room for continued bullishness.

The possible upside targets are 6975-7038 initially, while the market stays above 6085 and 5700. This could be followed by a large correction, but if that does not happen and if there is a post-poll euphoria (say if the BJP manages to sweep the General Election) we might target 8200-8500 going into 2015-16. Thereafter 2017 could be a bear market that could last till 2019, before a full-blown real bull market emerges.

THE CURRENT RALLY IN THE CONTEXT OF ELECTION YEARS

Table: Monthly % returns in run up to elections
Table: Monthly % returns in run up to elections

This being an election year, we examine what has happened in earlier election years. Pre-election rallies, which even hit new highs, is not unusual. Out of the last 6 elections, we got a pre-election rally in 4.

We have a pre-election rally this time around also, but the current rally doesn't look like much compared to earlier times, especially when the return is considered on a monthly closing basis. Obviously, higher levels and a higher closing this month may improve the picture a lot, but catching up with the real stunners like 1996 or 1999 seems unlikely.

Importantly, there could be a similarity with 1999 when the market hit a new high in the month just prior to the elections, like it seems to be doing now. But the magnitude of the rise this time around is much smaller. Plus, we have to remember that after the 1999 elections the market peaked 6 months later in 2000 and went on to retrace 90%+ of the earlier rally. Now that we are hearing a lot about 7000+ levels, could a similar peak and subsequent decline happen this time around as well? Or can we look for levels beyond 7000?

NOTES:
(*) 10.3% rise in Jul-99, a new 5 year High till then
(*) 7.8% rise in Aug-99, a new Life High till then. The upmove continued thereafter to register a new Life High (till then) in Feb-00.
(*) A new life high was made in Dec 2003, i.e. 4 months before the elections. Of course, the Dec-13 high has since been surpassed.

THE MEGA BULL SCENARIO: IS A 5-YEAR UPMOVE IN THE OFFING?

Nifty Monthly Log chart

This Nifty Monthly Log chart shows a pronounced uptrend within the blue channel trendlines. The contracting triangle in the 2001-2003 period at the bottom of the chart is compared with the contracting triangle seen in current period since 2011. The market is in the process of confirming a bullish break above the triangle and a new bull market might just be getting born.

As per this chart, there is no need to keep looking for a top in the market now as long as the lower blue channel (currently near 5700) holds. If this chart reading is correct, we could be looking at levels well beyond 7000 in the years ahead and the market should be bought on all dips.

Technical details (Skip if you want, read to experience the joys of pure technical analysis):

Two questions may arise to the serious chart reader - why D is taken near the 6000 high of 2013? Also why has E been marked just above 5000?

Actually, both have been taken from the perspective of TIME. Every other thing just fitted nicely. As per the marked points, C had taken 407 days and D had taken 406 days. E, very importantly, gets its significance from not only the blue long term channel, but also from fact that it took place on the 1024th day from the 2010 top at B, which is comparable to the 1035 days time span between the 2008 top (unmarked) and the 2010 top at B. The difference between the two instances is only 11 days. That makes the low of 5119 very important.

Now let us look at other possibilities. What if this is NOT a mega-bull market as suggested by the chart above? As seen in the previous page, the similarity with the 1999 scenario makes it imperative to examine non-bullish possibilities as well, especially given the fact that the sectoral indices are severely underperforming.

STUDY OF DIAMETRICS (NEO-WAVE ANALYSIS)

A hard look at the current rise from the low of 5119 shows some amazing symmetry in terms of both price and time, in both the short term and long term. The time-price similarities brings into consideration a Neo-wave pattern called 'Diametric', discovered and propounded by Glen Neely. A short introduction to Diametric is given on the last page.

SHORT TERM DIAMETRIC

Short term diametric chart

Waves Table As seen in the chart above and table alongside, every fall (Waves B, D, F) takes about 8-9 days. Further, we can see also 3 drops from the red "e" to the blue "F", every one making lows within 8-9 sessions of the swing high.

Thus, in the current market scenario, whenever a fall of around 350-450 points comes in 8-9 sessions, we can search for buying opportunities with a tight stop loss.

Note, E has been taken at 6356 in Feb-14 instead of at 6415 earlier in Dec-13, adhering to the principle of "faster retracement", which is beyond the scope of the current discussion. But an alternate labeling (in red) is shown.
If this count works, what could be the extent of the rally? Generally, the G leg tends to be equal to A. Taking the origin of the current rally (G) at 5933 gives us a target of 6957 or a lower 6757 (if we take the starting point of A at 5319). Taking the origin of (G) from 5985 (f) gives us slightly higher targets of 6809 and 7009.

Interestingly, at the current high of 6575, the current rally is showing perfect equality with the C leg in price terms. Could this be a near term top? As we will see in the Long Term section overleaf, this high of 6575 is significant from other perspectives too. That said, please note, the price action so far does not imply that a top has been made and confirmed.

As per the beauty of a true blue Diametric, we can confirm a MAJOR top only when a fall of more than 442 points (490 to be safe) points take place in less than 8 sessions. Till then, the rally may continue. But does the long term picture support a bullish view?

LONG TERM DIAMETRIC

The long term possibility of the Indian equity markets suggests continuation of the Indian Growth story in the coming years. But, there may be need for some caution before the next boom comes.

Nifty Long term Diametric

EARLIER PERIOD: 1992 TO 2001

Wave Table1

The Time-similarity within the 1992-2001 period is clear. Indeed, that is the first clue in recognizing the pattern. 4 out of 7 legs, spread over a period of 9 years took nearly the same amount of time (3 legs took exactly 16 months, 1 leg took 13 months).

Note that the movement till end of D took 66 months.

The Price-similarity between the Waves, measured in percentages terms, is also stark:

  • A and G (53.2% each)
  • B and F (125% and 127.3% respectively)
  • C and E (42.6% and 38.3% respectively) differ by a mere 4.3%.
CURRENT PERIOD: 2008 ONWARD

Wave Table2

We find Time-similarity again in current scenario since 2008. This time 3 out of 6 legs (A, C and D) have taken nearly the same time (14-15 months) and 2 legs (E and F) may end up being the same (8 months).

Interestingly, the movement uptil D is 64 months, very close to the 66 months taken in the 1992-2001 period.

Price-wise, the E leg has been the smallest (16.3%) as was the case even in the 1992-2001 Diametric (38.3%). The current rally or the F leg has just hit exact equality with the C leg at 6575. Could this be a top?

But, equality with the D leg gives us a target of 7038 and if the market explodes after the elections, it may achieve equality with A, giving us a target of 8190.

Here is another calculation from a different perspective. Check the "F" leg in the 1992-2001 period in the long-term Diametric chart (previous page) which topped out in 2000. This is the post-1999 election peak pointed out in the "election table" on the first page. This 2000 top was 40% higher than the previous 1997 top (point D in referred chart) and 31% higher than the till-then life high of 1994 (point B in the referred chart).

Imposing these movements onto the current period since 2008, a 40% upside from the current period "D" and 31% upside from the current period "B" in the chart above gives us possible targets of 8300-8550, nicely coinciding with the pattern target. This is also supported by the possible equality of G & A of the larger Diametric on the chart just above.

THE BEAR CASE

Having pointed out the bullish possibilities in the charts above, we have to remember that the current market is not a full-fledged bull market like 1980-1992 or 2003-2008. Huge risk may still be there, especially from the global markets. Plus, as mentioned in the beginning, many sectoral indices are underperforming. Thus, even in case there is an extended upmove, all boats may not rise in the flood and only a few sectors could be seen pulling the market up, as was the case in the bull market of 1999-2000, where the main leader was IT and all the other sectors were just passive players.

Even if we see an upmove in the coming months, we have to remember it took 9 years from the 1992 top to make the final low and another two years of consolidation before launching the last real bull market. Following the same route, it is possible to see a major low in 2017 (after the current 8 year cycle culminates in a top in 2016) and a true blue bull market to begin only by 2019. In the mean time, the asynchronous nature of the market may demand very skillful stock picking to make a handsome return from any possible upmove, and not necessarily from the index stocks only.

LEANING TOWARDS THE BULLISH

Looking at the very big picture, the red channel can't be overlooked as it contains the whole secular bull market. Irrespective of the Diametric scenario coming true or not, IF and WHENEVER Nifty touches the lower red trendline, we can expect a MAJOR SECULAR multi-year rally. But a fall to the lower red trendline does not appear at all likely at the moment.

We already know of the "8 year cycle" prevalent in the Indian equity markets. In 1984 the biggest percentage rally found its real momentum, although the rally was on from 1980. Thereafter, the market topped out 8 years later in 1992 after the Harshad Mehta scam. Next, the IT boom turned into a bust in 2000. Still later, the famous bear market came in 2008. An 8-year extrapolation from the 2008 bottom gives us 2016 as the time for next possible major top.

Keeping in mind the 8 year cycle detailed above, and the fact that Election years have a history of producing huge, often unanticipated, moves after the results, we may have to lean towards the more bullish possibilities for the market, even if they seem improbable and stretched right now.

We must remember that the biggest and fastest moves come as trend continuations, not as trend reversals. This is evident from 2004, when the post-poll crash came in a market that was already selling off from the Dec-13 high. Or it can be seen in 2009, when the first upper circuit took place after a 40-50% rally. Or it can even be seen in the 6% single-day rise in 1999, coming in an uptrending market.

SYNTHESIS AND CONCLUSION

Putting all of the above together, we lean towards long-term bullishness for now while the market stays above 6085 and 5700. The possible targets are 6975-7038 initially. This could be followed by a large correction, but if that does not happen we might target 8200-8500 going into 2016 in the event of a post-poll euphoria. Thereafter 2017 could be a bear market before a full-blown bull market finally emerges that could last till 2019.

A NOTE ON DIAMETRICS, A NEO-WAVE ANALYSIS

In the words of the discoverer Glen Neely himself:
These patterns began to appear in the early 90's as the market's way to adjust to the increasing popularity of wave theory (too many people were looking for the same things, so the market created new ways of behaving).

They were the first patterns witnessed where most wave segments took about the same amount of time, with one or two of the waves consuming a little more (or little less) time than the others.

While most waves consume a similar amount of time, they do NOT consume a similar amount of price. A Diametric will possess an obvious expansionary or contractionary bias during the first four waves of the pattern; that bias will reverse during the second half of the formation.

It is called "Diametric" because it combines two Triangular patterns, one initially "Contracting" up to the "d" leg, followed by an "Expanding" one. The contraction point is the "d" leg, and the legs on either sides of it tend to be equal.

Analyst's comment:
We have seen frequent occurrences of this pattern in the Indian markets as evident in the charts above.

Neowave patterns like Diametrics sometimes help us make better sense of the world, stepping outside the ambit of classical Elliott Wave analysis.



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