Index outlook 2017: In a long-term consolidation

It’s time to go through our annual exercise of reviewing the long-term outlook for the Sensex and the Nifty once again. Since these are long-term trends, course corrections are seldom needed. Our long-term view has remained largely unchanged over the last six years.

The structural bull market that has been in force since 2001 is not under a threat yet. But that said, the manner in which the rally fizzled out in 2016 is a little disconcerting and implies that index movement could get rocky in 2017.

There has been a marked shift in medium-term trend in the Sensex and the Nifty from last September. The indices received a leg-up from benign global central bank policies and recovery in commodity prices that helped them rally almost 30 per cent from February 2016 lows. But expectation of Fed rate hike coupled with the election of Donald Trump as the President of the US and the Centre’s demonetisation dragged indices lower to close the year on a flat note.

Uncertainty is likely to persist in the coming year with foreign flows under a cloud due to further Fed rate hikes and the strengthening dollar. The impact of the cash crunch on demand in the December and March quarter will also cast a cloud on sentiment.

The medium-term trend in the Sensex and the Nifty is not very rosy at this juncture. A protracted consolidation phase has been in progress since the March 2015 peak of 30,025 in the Sensex and 9,119 in the Nifty. The deep pull-back in February 2016 and the reversal from the September 2016 peak make it quite likely that a three-part zig-zag pattern that began in March 2009 lows was completed at the peak formed in 2015.

If the entire move from 2009 to 2015 is currently being corrected, the benchmarks will stay in a broad band for the next couple of years, at least. The band for the Sensex is between 21,000 to 32,000 and the Nifty could move between 6,600 and 10,000.

As long as the Sensex trades above 21,000 and the Nifty above 6,600, we will retain the view that the indices are building a base for moving higher over the long term. The positive long-term view will need a review only if these levels are breached.

This is the tricky part. The third part of the correction that began from the 2015 peak appears to be unfolding currently. This move can drag the Sensex to 24,423 or 21,546. The corresponding targets in the Nifty are 7,700 and 6825.

To put it simply, the current correction can halt in the zone around 25,000 in the Sensex and 7,700 in the Nifty and there can be another rally towards a new high. But breach of these levels can cause severe damage to stock prices, dragging the Sensex to 21,546 and the Nifty towards 6,825.

The first two months of the year, with the Budget scheduled on February 1, will give us clues about the extent to which the correction can extend. It would be best to tread cautiously in the initial months, especially if your investment horizon is short.

However, if the Sensex moves above 27,800 and the Nifty above 8,600 in the next few weeks, it will mean that the indices are heading towards a new high.

Indian equity markets are in a structural bull market since 2001. One wave (phase) of this uptrend ended at the 2008 peak. The decline in 2008 corrected over two-thirds of the previous up-move and hence qualifies as the second wave.

The third wave of this bull market, that has been on since the March 2009 low, has the minimum target for the Sensex between 37,000 and 42,000. The corresponding levels in the Nifty are between 11,000 and 12,000. The upper targets exceed 70,000 on the Sensex and 19,000 on the Nifty.

This analysis is based on Elliott wave principles and seeks to provide guide-posts that help in making investment and trading decisions over the year. Under E-wave theory, we work with many counts, simultaneously. The most likely count is presented here with indicative levels that will negate a particular count and bring another count into play.

The short-term outlook is not too promising for the Nifty and the Sensex

Nifty: The short-term trend in the Nifty is sideways between 7,893 and 8,306. But short-term investors need to tread cautiously since this sideways move follows the decline from the 8,968-peak. The Nifty has strong resistance at 8,300 due to the presence of the 38.2 per cent Fibonacci retracement level and the 200-DMA there.

Short-term traders can go short if the Nifty fails to move above 8,300. Downward targets are 7,893 or 7,643.

Rallies will face resistance at 8,438 and 8,567.

Sensex: The Sensex too faces strong resistance at the 27,000 level where the 200-DMA is poised. The 50-DMA moving below the 200-DMA is a negative for the short term.

If the Sensex reverses lower from current levels, it can decline to 26,210 and 25,753. Next target for the index is 25,000.

Rallies will meet resistance at 27,424 and 27,804.