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“Fasten your seat belts… Turbulence ahead”
The Mayans had predicted that the world will end in 2012. If one looks at
the key domestic and global headwinds staring at us, the economic
outlook for 2012 seems equally gloomy
In the year 2011, benchmark indices, the Sensex and Nifty ended down
over 24% each. India ranks among the worst performing markets globally.
The only consensus among market participants is that the markets and
global economies in 2012 are going to be volatile, uncertain, and things
are likely to get a whole lot worse before they start getting better
Global events, mainly those in the Euro-zone will undeniably influence the
course of our market in 2012. Markets across the globe, including ours,
are likely to remain volatile for first half of the year
Indian equities are staring at more turbulence ahead as political deadlock,
a surging fiscal deficit, slowing growth and limited foreign inflows
continue to impinge on investor sentiment in a market that is already
Asia’s worst performing this year (Refer Exhibit:1)
OUTLOOK
The key principles of “History repeats itself” and “Price discounts
everything” have stood the test of time in guiding the practitioners of
Technical Analysis. Therefore we remain guided by these principles while
we form our prognosis for the year 2012
Based on the following technical arguments appended in this report, we
expect the Sensex to hit a major trough of 12000-12500 levels in the first
half of 2012 and then spend some time consolidating to gain a foothold
for staging rally back to 16500-17000 levels in later half of 2012 as
envisaged in the below chart
Key technical observations
• Breach of Yearly lows has historically seen further cut of minimum
20% which projects downsides towards 12500
• Current down move since November 2010, which is labelled as `C’ leg
of a Triangle, is expected to at least achieve 61.8% magnitude of 2008
fall which works out to 12800
• Weakening Indian rupee against the greenback to the extent of 56-57
levels, would further instigate the downslide in equities
As per our preferred assumption, index is currently forming larger `C’
Wave of a possible Triangle formation which commenced since 2008
highs. Within this formation, sharp fall from 2008 high till Feb 2009 (21206
– 8047 levels) is considered as Wave `A’ of the triangle which consumed
14 months. Wave `B’, starting from March 2009 lows till November 2010
high (8047 – 21108 levels) consumed approximately 21 months.
Decline from November 2010 which so far does not display impulsive fall
and labelled as Wave C, therefore expected to consume at least 17
months (50% of the time consumed by A and B waves together) Since
Wave `C’ has already consumed 13 months, index is expected to remain
under current Bear siege at least for another four months which is a
minimum time requirement for completion of Wave `C’.
What are charts talking about markets in CY 2012?
Going by the aforementioned evidence, we believe the indices could wind
up the southward journey by second quarter of CY 2012. However the
bull phase may still have to wait as the indices can remain lethargic and
spend a few months in consolidation mode which is also a pre requisite
for any sustainable rally to materialise thereafter.
It would be only during the third quarter of 2012 that the Sensex is
expected to stage a meaningful rally in the form of higher peaks and
troughs. Such a rally would be termed as `D’ wave of the larger Triangle
which will have minimum price target of 16,500 levels (50% retracement
of the C wave)
Key supports for the Sensex are placed in the range of 12500 – 12000
Structurally, the decline over past one year has been a channelled affair
(Refer Exhibit:3) and as long as the channel remains intact, we may
continue to assume all rallies as temporary phenomenon, with each fall
getting retraced by only 75%-80%
Major supports for recent declining trend can be identified in the range of
12000-12500 levels as multiple technical studies confluence in this zone
• The golden Fibonacci ratio of 61.8% of the entire rally from October
2008 low (7697) to the November 2010 high (21108) is placed around
12820
• The rising gap area of the only upper freeze in the history of Indian
equity markets is placed in the range of 12250-13200
• The minimum projection of 20% fall from Year 2010 lows (15652)
would work out to around 12500 levels (detailed later)
Breach of Year 2010 lows signals larger price cut and time damage
Over the past two decades, there have been four major instances when
the index breached its previous yearly lows. First three instances
triggered jitters in the equity markets and led to a steeper correction.
Exhibit 6: Instances of Sensex breaching previous year low
1994 1996 Points Change % Change
1st Instance 3405.88 2713.12 692.76 -20.34%
2000 2001 Points Change % Change
2nd Instance 3491.55 2594.87 896.68 -25.68%
2007 2008 Points Change % Change
3rd Instance 12316.10 7697.39 4618.71 -37.50%
2010 2012* Points Change % Change
4th Instance 15651.99 12500* 3152 -20.00%
Source: ICICIdirect.com Research
* Projected downside considering minimum 20% cut post breach of 2010 yearly low
In the current scenario, CY 2010 lows (Sensex: 15652, Nifty: 4675.40)
have been violated in December’11. Going by empirical evidences, once
the yearly lows are decisively breached, a minimum 20% cut from the low
has been a usual phenomenon. Therefore, a fall of 20% magnitude from
15652 / 4675 would imply levels of 12500 / 3800 on the downside
Further evidence can be derived from the fact that the most of the major
sectoral and broader indices have plunged significantly after breaching
their respective yearly lows much before the benchmarks
Time wise, there has not been any peculiar behaviour in terms of
achieving these price objective as the time consumed for such declines
has varied between one to 23 months in previous three instances
Sensex in retrograde
As indices are gearing up for more distressful year ahead, we feel it is
important to keep in mind the overall long term structure of the index in
order to ascertain where we are currently positioned
Leading benchmarks have progressed through some identifiable time
cycles and price behaviour since their inception. One such important
cycle has been the 8 year time cycle since 1984
Eight year cycle phenomenon
As shown in the chart below, 1984 was the beginning of the eight-year
long Bull Run. The next important turning points occurred exactly eight
years thereafter, in 1992, 2000 and more recently in 2008. While first two
turning points coincided with the two biggest stock market scams in
Indian financial markets, third one had global financial crisis to blame.
While oscillations of smaller degree would continue within this larger time
frame, we can observe from history that after major 8 year cycle tops the
index spends at least four years in consolidation phase which is the most
painful period for investors. Year 2012 is expected to remain as part of
this larger consolidation as explained at the beginning of this report
Sectoral outlook: Will the leaders of last cycle continue to shine?
For the long term investors, one key take away from the aforementioned
8 year cycle study is that the stocks / sectors which were the darling of
the street in the run-up to these peaks eventually became the most hated
ones for many years thereafter and under performed the benchmarks
significantly
There is of course a rationale behind these sectors / stocks
underperformance. The primary reason being that these stocks remained
heavily over owned in the run-up to the 8 year cycle highs and when the
tide turns in the favour of the bears they go out hammer and tongs,
determined to butcher these stocks from their peaks. Ambivalent about
the magnitude of subsequent decline, many long term portfolios that
participate at the fag end of rally end up owning these stocks. The general
tendency of averaging out at lower levels in turn back fires for these stuck
up portfolios as at every rise there is ample supply
Prolonged period of non-performance compels smart money to move out
of these sectors / stocks and the subsequent sector rotation sees
emergence of new leaders
Historical evidence also supports the aforementioned observation that
leading sectors/stocks of the major rallies as per the eight year cycle
remain underperformers for many years as exhibited below:
Exhibit 9: Behaviour of the leaders post 1992 cycle
Stock High % Corr. Cons. Period Cons Range Beginning of Next Bull phase
ACC 401 80% 11 years 295-80 2003
TISCO 354 88% 11 Years 165-42 2003
SAIL 80 94% 11 Years 26-05 2003
Source: : ICICIdirect.com Research
Technical Outlook
The USD/INR pair bottomed out around 39 levels in early 2008 coinciding
with the Sensex top of 21000. Thereafter, the USD/INR pair rallied to hit
major peak at 52 levels again coinciding with Sensex bottom (8047) in
March 2009.
In the year 2010, when the Sensex retested its 2008 highs, the USD/INR
pair retraced its 2008 rally by precisely 61.8% (Golden ratio) and zoomed
back from 44 levels to make new high in 2011.
Equality to the first rally (39-52) from 2011 lows of 44 projects the US
dollar rallying towards 56-57 levels against Indian rupee. This would mean
more trouble for Indian equities as it can leave a lasting scar on the
economy and corporates, which are already bruised by higher interest
rates, slumping output and declining consumer demand.
Price discounts everything
The following chart exhibits the key events concurrent with the Sensex
graph, which highlights some interesting observations
As visible from the chart, markets usually tend to take the major negative
news flows / events in their stride and bottom out. At such junctures
while the sentiment is still sceptical price seems to have already factored
in the fear, hope and expectations of market participants viz. Political
uncertainties, European debt crisis etc
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
“Fasten your seat belts… Turbulence ahead”
The Mayans had predicted that the world will end in 2012. If one looks at
the key domestic and global headwinds staring at us, the economic
outlook for 2012 seems equally gloomy
In the year 2011, benchmark indices, the Sensex and Nifty ended down
over 24% each. India ranks among the worst performing markets globally.
The only consensus among market participants is that the markets and
global economies in 2012 are going to be volatile, uncertain, and things
are likely to get a whole lot worse before they start getting better
Global events, mainly those in the Euro-zone will undeniably influence the
course of our market in 2012. Markets across the globe, including ours,
are likely to remain volatile for first half of the year
Indian equities are staring at more turbulence ahead as political deadlock,
a surging fiscal deficit, slowing growth and limited foreign inflows
continue to impinge on investor sentiment in a market that is already
Asia’s worst performing this year (Refer Exhibit:1)
OUTLOOK
The key principles of “History repeats itself” and “Price discounts
everything” have stood the test of time in guiding the practitioners of
Technical Analysis. Therefore we remain guided by these principles while
we form our prognosis for the year 2012
Based on the following technical arguments appended in this report, we
expect the Sensex to hit a major trough of 12000-12500 levels in the first
half of 2012 and then spend some time consolidating to gain a foothold
for staging rally back to 16500-17000 levels in later half of 2012 as
envisaged in the below chart
Key technical observations
• Breach of Yearly lows has historically seen further cut of minimum
20% which projects downsides towards 12500
• Current down move since November 2010, which is labelled as `C’ leg
of a Triangle, is expected to at least achieve 61.8% magnitude of 2008
fall which works out to 12800
• Weakening Indian rupee against the greenback to the extent of 56-57
levels, would further instigate the downslide in equities
As per our preferred assumption, index is currently forming larger `C’
Wave of a possible Triangle formation which commenced since 2008
highs. Within this formation, sharp fall from 2008 high till Feb 2009 (21206
– 8047 levels) is considered as Wave `A’ of the triangle which consumed
14 months. Wave `B’, starting from March 2009 lows till November 2010
high (8047 – 21108 levels) consumed approximately 21 months.
Decline from November 2010 which so far does not display impulsive fall
and labelled as Wave C, therefore expected to consume at least 17
months (50% of the time consumed by A and B waves together) Since
Wave `C’ has already consumed 13 months, index is expected to remain
under current Bear siege at least for another four months which is a
minimum time requirement for completion of Wave `C’.
What are charts talking about markets in CY 2012?
Going by the aforementioned evidence, we believe the indices could wind
up the southward journey by second quarter of CY 2012. However the
bull phase may still have to wait as the indices can remain lethargic and
spend a few months in consolidation mode which is also a pre requisite
for any sustainable rally to materialise thereafter.
It would be only during the third quarter of 2012 that the Sensex is
expected to stage a meaningful rally in the form of higher peaks and
troughs. Such a rally would be termed as `D’ wave of the larger Triangle
which will have minimum price target of 16,500 levels (50% retracement
of the C wave)
Key supports for the Sensex are placed in the range of 12500 – 12000
Structurally, the decline over past one year has been a channelled affair
(Refer Exhibit:3) and as long as the channel remains intact, we may
continue to assume all rallies as temporary phenomenon, with each fall
getting retraced by only 75%-80%
Major supports for recent declining trend can be identified in the range of
12000-12500 levels as multiple technical studies confluence in this zone
• The golden Fibonacci ratio of 61.8% of the entire rally from October
2008 low (7697) to the November 2010 high (21108) is placed around
12820
• The rising gap area of the only upper freeze in the history of Indian
equity markets is placed in the range of 12250-13200
• The minimum projection of 20% fall from Year 2010 lows (15652)
would work out to around 12500 levels (detailed later)
Breach of Year 2010 lows signals larger price cut and time damage
Over the past two decades, there have been four major instances when
the index breached its previous yearly lows. First three instances
triggered jitters in the equity markets and led to a steeper correction.
Exhibit 6: Instances of Sensex breaching previous year low
1994 1996 Points Change % Change
1st Instance 3405.88 2713.12 692.76 -20.34%
2000 2001 Points Change % Change
2nd Instance 3491.55 2594.87 896.68 -25.68%
2007 2008 Points Change % Change
3rd Instance 12316.10 7697.39 4618.71 -37.50%
2010 2012* Points Change % Change
4th Instance 15651.99 12500* 3152 -20.00%
Source: ICICIdirect.com Research
* Projected downside considering minimum 20% cut post breach of 2010 yearly low
In the current scenario, CY 2010 lows (Sensex: 15652, Nifty: 4675.40)
have been violated in December’11. Going by empirical evidences, once
the yearly lows are decisively breached, a minimum 20% cut from the low
has been a usual phenomenon. Therefore, a fall of 20% magnitude from
15652 / 4675 would imply levels of 12500 / 3800 on the downside
Further evidence can be derived from the fact that the most of the major
sectoral and broader indices have plunged significantly after breaching
their respective yearly lows much before the benchmarks
Time wise, there has not been any peculiar behaviour in terms of
achieving these price objective as the time consumed for such declines
has varied between one to 23 months in previous three instances
Sensex in retrograde
As indices are gearing up for more distressful year ahead, we feel it is
important to keep in mind the overall long term structure of the index in
order to ascertain where we are currently positioned
Leading benchmarks have progressed through some identifiable time
cycles and price behaviour since their inception. One such important
cycle has been the 8 year time cycle since 1984
Eight year cycle phenomenon
As shown in the chart below, 1984 was the beginning of the eight-year
long Bull Run. The next important turning points occurred exactly eight
years thereafter, in 1992, 2000 and more recently in 2008. While first two
turning points coincided with the two biggest stock market scams in
Indian financial markets, third one had global financial crisis to blame.
While oscillations of smaller degree would continue within this larger time
frame, we can observe from history that after major 8 year cycle tops the
index spends at least four years in consolidation phase which is the most
painful period for investors. Year 2012 is expected to remain as part of
this larger consolidation as explained at the beginning of this report
Sectoral outlook: Will the leaders of last cycle continue to shine?
For the long term investors, one key take away from the aforementioned
8 year cycle study is that the stocks / sectors which were the darling of
the street in the run-up to these peaks eventually became the most hated
ones for many years thereafter and under performed the benchmarks
significantly
There is of course a rationale behind these sectors / stocks
underperformance. The primary reason being that these stocks remained
heavily over owned in the run-up to the 8 year cycle highs and when the
tide turns in the favour of the bears they go out hammer and tongs,
determined to butcher these stocks from their peaks. Ambivalent about
the magnitude of subsequent decline, many long term portfolios that
participate at the fag end of rally end up owning these stocks. The general
tendency of averaging out at lower levels in turn back fires for these stuck
up portfolios as at every rise there is ample supply
Prolonged period of non-performance compels smart money to move out
of these sectors / stocks and the subsequent sector rotation sees
emergence of new leaders
Historical evidence also supports the aforementioned observation that
leading sectors/stocks of the major rallies as per the eight year cycle
remain underperformers for many years as exhibited below:
Exhibit 9: Behaviour of the leaders post 1992 cycle
Stock High % Corr. Cons. Period Cons Range Beginning of Next Bull phase
ACC 401 80% 11 years 295-80 2003
TISCO 354 88% 11 Years 165-42 2003
SAIL 80 94% 11 Years 26-05 2003
Source: : ICICIdirect.com Research
Technical Outlook
The USD/INR pair bottomed out around 39 levels in early 2008 coinciding
with the Sensex top of 21000. Thereafter, the USD/INR pair rallied to hit
major peak at 52 levels again coinciding with Sensex bottom (8047) in
March 2009.
In the year 2010, when the Sensex retested its 2008 highs, the USD/INR
pair retraced its 2008 rally by precisely 61.8% (Golden ratio) and zoomed
back from 44 levels to make new high in 2011.
Equality to the first rally (39-52) from 2011 lows of 44 projects the US
dollar rallying towards 56-57 levels against Indian rupee. This would mean
more trouble for Indian equities as it can leave a lasting scar on the
economy and corporates, which are already bruised by higher interest
rates, slumping output and declining consumer demand.
Price discounts everything
The following chart exhibits the key events concurrent with the Sensex
graph, which highlights some interesting observations
As visible from the chart, markets usually tend to take the major negative
news flows / events in their stride and bottom out. At such junctures
while the sentiment is still sceptical price seems to have already factored
in the fear, hope and expectations of market participants viz. Political
uncertainties, European debt crisis etc
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