20 November 2010

Nifty : Long term View

Wanted to share long term technical picture of Nifty. Please see the chart below, which is a log scaled Nifty chart from middle of 1994, didn't had data so will try to base my findings on whatever I can get hold of.

What we see till 1999 is a very range bound market, and after that a significantly strong rally for a year. I have labelled the Elliot wave counts and would be glad to receive comments on it. And if I am correct, predicts a disastrous correction after the end of the ongoing 5th wave (some signs are there that it may already have ended but I will wait for some more confirmation signs).

How do I justify the count?
After the obvious first look 5 wave formation from 1999, we try to see if the other assumptions are satisfied.
- The strongest wave is the third wave.
- Wave 1 starts after a long consolidation (rally starts when you have no interest in stocks)
- Wave 2 is a triangle and wave 4 a sharp zigzag (alteration principle)
- Wave 5 is accompanied with lots of divergences

Though I am still open to being incorrect, I will definitely not ignore this build up. The impact of the current formation has a long and large one.

What Impact IT can have?
First and foremost principle of Elliot Wave theory is that after a 5 wave upside be prepared to see a 3 wave downside move.
The size of the wave that we are talking about here is enormous. Its age as of now is 12 years! I would expect the correction to span around a third of it.
The correction should be a zig-zag one as we can see the correction before the rally started was a flat one.(?)
Fibonacci retracements do not mean much for such large corrections, so we will need to base our target on observations. Which basically says we have a minimum target of going below the end of 4th wave and most probably into the region of 2nd wave.
Also, again the fact that we are talking about an extremely large correction, it just cannot be a trading correction. It has to be accompanied with lots of bad news and a possible crisis. I expect the extremely bullish sentiment about the growth of emerging economies could be the reason.

Where can I go wrong?
I am expecting 5th wave top to be made pretty soon if not already made. This 5th wave as not going higher than 3rd wave top is called a truncated 5th wave, which are rare and have more than normal bearish impact.
So there is all possibility of Nifty clearing the recent highs as well as 3rd wave top and make a new life time high, throwing all fears into the garbage yet again. But remember this 5 wave pattern will still be very much in contention and it will be only a matter of time when the large correction which I am pointing starts.

Though the sentiment is extremely bullish and people don't even think Nifty can fall to 5000, 4000 or 3000 ever depending on their bullishness levels, its important to remember that the more things look certain the lesser is its probability in stock markets.

Only time will tell as to what is going to happen, but I feel if I am correct we are going to get another fabulous investment opportunity and it may well be of our life time.


Post a Comment