2011 will be remembered as an ignominious year in which the high recorded in the first trading session by Sensex turned to be its yearly high. Stocks slipped lower in protracted declines interspersed with ephemeral rallies. Sensex and Nifty ended the year down 24 per cent. But the pain was greater in the small- and mid-cap universe. The BSE mid-cap and small-cap indices closed the year down 34 per cent and 43 per cent respectively.
Long-term trend
In our 2011 outlook published on January 2, 2011, we had charted the movement of Sensex over the next decade. A quick recap: Wave 1 of a structural bull market that commenced in 2001 ended at the January 2008 peak of 21,207. The 2008 crash was the second wave that ended at 8,047 in March 2009. The third wave of this bull market is now in progress. The first two targets of this wave are 39,337 and 58,743 (to be achieved in the next 10 years). This count continues to be valid and will be negated only on a close below 13,000.
That said, the index movement in 2011 makes it necessary that we remain open to the completion of a long-term five-wave pattern at the November 2010 peak. Even if that is the case, 30 and 38.2 per cent decline from the peak gives us the targets — 14,775 and 13,044. The area around 13,000 once again emerges a strong buttress. The strength in the Dow that continues in a long-term uptrend that commenced in 2009 is a supportive factor. Other Asian benchmarks too appear to be in a correction of the up-move from 2009 lows rather than in new structural downtrends.
2012
Both Sensex and Nifty ended 2011 close to their yearly lows. These indices have spent the second half of 2011 flirting with the 38.2 per cent retracement of the previous up-move that occurs at 16,118 for Sensex and 4780 for the Nifty. Next retracement supports for the indices are at 14,577, 13,924 and 13,036 for Sensex and 4438, 4248 and 3990 for Nifty.
We are ambivalent on the outlook for the next few months. Both Sensex and Nifty are currently in a medium-term trading range; between 4,500 and 5,500 in Nifty and 15,000 and 18,000 in the Sensex. If the lower boundary breaks, the indices can test the supports mentioned above. Such a decline will hasten the bottom-formation process.
But if this sideways move is a base for the next up-move, Sensex can head towards 19,000 (Nifty 5650) and its previous life-time high over the rest of 2012. Our preferred range for Sensex is between 13,000 and 19,000. Outer limits are 9,500 and 22,000. For Nifty, the preferred range is between 4,000 and 5,700. Outer limits are 6,300 and 2,852.