Let us start with the quarterly chart of the Sensex, as Sensex has more data. The Indiacharts Momentum indicator during major bear markets the cycle went back to zero. The last time that happened was 1998 and 2000.On all other occasions since then, the cycle has not gone back to zero, and bear markets ended at the green 40-quarter average. If indeed the 2001-2022 bull market was one single bull market and has ended then the sell signal that may come at the end of June 2022 on the quarterly chart could be a reason to expect us to break the 40-quarter average at 35920 and go to the lower band near 25600. This is the worst-case scenario if a 21-year-long bull market has just ended. The 40-quarter average for Nifty is at 10761. But things do not have to get that bad, or do they?
In Elliott Wave terms we are presuming that we are in wave 2 of a bull market starting in 2020 so far. If this is wave 2, we can go back to the previous support zone near 14151 to start with. On the monthly chart below the momentum indicator is in sell mode and at the end of June, we will watch if the 20-month average at 15963 breaks on a closing basis. This is important because from 2003-to 2008 all corrections found support at the 20-month average. A multi-year bull market builds on it.
So, if you think the current market correction has similarities to 2004 then we should not close below this level. If we do, we are going down to the 40-month average at 14172. That is very close to 14151 the 4th wave low. A 38.2% retracement of wave 1 is also at 14400. So, this is a nice cluster for a bottom to consider first.
However, if the Nasdaq is doing the bubble pop and decline back to the 2020 lows as to be further confirmed by this month closing below the monthly band, then the second wave in Nifty can also go back to 61.8% of wave 1 that is at 11750 for Nifty. Now here is a perspective of US tech and India over time. The US tech bubble of 2000, is when FIIs really started to invest in India at scale. Not during the bull run but in the subsequent bear market. Yes, FIIs bought the highest monthly inflows into Indian stocks at that time when stocks were falling.
You see Indian stocks were breaking out of a long consolidation in 2000. I mean non-tech sectors. Stocks like ACC and RIL etc. So, the Y2K bubble popping pushed that nascent bull market into wave 2. And Nifty retraced 88% of its gains and so did many stocks. Then wave 3 started in what ended up being a commodity and EM bull market as well. Why? because the dollar rolled over into a bear market. So that is what I started to anticipate in 2020. In 2017 I thought that the dollar would do what it is doing today, the final spike that ends a bubble. But it rolled over. I switched camp. But now the dollar is doing just that today so I cannot ignore that the final dollar spike that ends all bubbles, is here.
The US tech bubble this time is not about Y2K but about every other tech. From online [FANG] to new age disruptions that are finding the PE route to listings, to Crypto and NFTs, and the whole idea that you need to create losses to build a disruption business. I am sure I have missed many other things in the everything tech bubble. Now that the new tech bubble is blowing up emerging markets are going into a bear market as well.
My big question is will it be the same. A wave 2 in Nifty? A deep retracement [which means much below 11750], and then will the dollar eventually roll over to the benefit of the emerging markets? The answer is either yes or that is what we want to hear. In either case, let us wait to get there. The next EM bull market can last for years then and maybe the 7+ years I was anticipating in 2020. If so then it will never be too late to enter. I just do not want to be early. I was explaining to Indiacharts subscribers who wanted to buy equity mutual funds recently that the difference between a 50% return and a 300% return is a 50% drawdown from where you are today. If you invest in something at a 50% lower price and it is 50% higher than today, you get 3x back. if you buy today see it fall 50% and then go there it’s only a 50% return and the pain in between. I think it is worth waiting for the bear market to be over and knowing that it is. Wait for the next dollar bear market to start.
Do not guess where the Nifty will bottom but let it complete the required structure and take it from there. Be mentally open that the situation being this bad anything is possible, there is nothing in the not possible camp as of now. Bear markets also clean out the bad actors and allow you to avoid the bad choices like HFCL that died in 2000, and never came back. You can only know that in hindsight. Even a possibly better name like Digital Equipment does not exist today. If the worst is over at 14200 we will figure it out anyway. Let us get to the destination and decide if this is where we wanted to be.
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Article – Written By Rohit Srivastava
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