Index outlook for 2018

As we begin 2018, there is a strong reason to feel nervous. Indian stocks kept surging higher in 2017, despite severe odds, buoyed by demand from domestic investors. There were just three slightly meaningful corrections last year, and none of them exceeded 5 per cent. If we expand the picture slightly, there hasn’t been a significant medium term correction since 2015, when the Sensex and the Nifty lost around 25 per cent from their peaks.

If we consider the gains made since March 2016, the Sensex is up 52 per cent and the Nifty is up 54 per cent. The trouble is that the Nifty Small Cap 100 Index has delivered 118 per cent return since 2016 while the Nifty Midcap 100 has delivered 89 per cent returns, indicating that the mid and small caps will be more vulnerable if a correction ensues.

The current situation is reminiscent of 2007, when a section of analysts turned cautious even as the other half came up with various reasons why the rally must continue. The difference between the two periods is that the economy as well as corporate earning were booming in 2007; it is the reverse currently. Against this background, the level of complacency among market participants, regarding the sustainability of the rally is worrisome.

It is however difficult to foresee when the rally can peak. Liquidity and increasing speculation can take prices to excessive levels, as witnessed time and again, in 1992, 2000 or 2008.

Here are some guideposts to help you navigate this tricky patch.

A long-term low was formed in Indian as well as many other global indices including the Dow Jones Industrial Average, UK’s FTSE and Germany’s DAX immediately after the 9/11 terror attack. The structural uptrend in the Sensex began from the September 2001 low of 2,594 and in Nifty, it was 850.

While the 2008 crash severely tested this uptrend, with the Sensex and the Nifty decreasing by 74 per cent of the previous move, both the Indian benchmarks managed a higher bottom in 2009. Other global indices however tested the 9/11 bottom in the 2008 crash and have begun a fresh structural uptrend from the 2009 low.

In order to align ourselves with other global markets, it is best to consider the movement of the indices from the 2009 low to judge the extent to which the current uptrend can extend.

The first part of the up-move from the 2009 low of 2,539 was completed at 6,338 in the Nifty. A protracted sideways move followed, which ended at 5,118 in August 2013. If we extrapolate the move from 2013, we get the next targets of 10,368 and 11,264 in the Nifty. Corresponding extrapolation in the Sensex makes us arrive at the targets of 35,499 and 38,581.

In other words, the current leg of the long-term uptrend has already achieved its minimum target. While the Sensex and the Nifty could rally further in the initial part of the year, a significant part of the uptrend could be nearing completion.

We will do a mid-year review of our long-term count if there is a strong move beyond 11,300 in the Nifty and 39,000 in the Sensex.

As explained above, the current leg of the long-term up-move began from the low formed in March 2016. The reversal and the strong rally in 2017 means that the third part of this move is currently unfolding. This wave has the targets of 9,915; 10687 and 11,164. The Nifty is inching close to the second target. If that is crossed, it can move on towards 11,164.

Corresponding targets in the Sensex are 32,335; 34,849 and 36,402. The Sensex is likely to touch the second target soon. If that is crossed, the next will come in to play.

It is apparent that there is a convergence of resistances near 11,200 in the Nifty. That is likely to be a key upside target for this year, if the rally continues. The Sensex has the upper band between 36,000 and 38,000.

In other words, there is likelihood of the indices moving a little higher in the initial part of the year. But there is a need to keep looking over the shoulders for a correction. Investors with a very short-term horizon can keep buying as long as the Nifty trades above 9,600 and the Sensex above 31,000. The medium term outlook will turn negative once these levels are crossed; that will be the cue for investors to retreat to the sidelines.

Initial targets for a medium-term correction would be 8,500 or 7,800 in the Nifty and 27,800 and 25,800 in the Sensex.

If the correction halts at the first targets, it will imply that there could be a time-based correction that can make the indices move sideways for a year or so before the long-term uptrend resumes.

But if the correction gets deeper, there is a possibility of the entire up-more from the 2009 low being corrected. In this case, the Nifty can decline to 7,500 or lower and the Sensex to 24,200.

Since the Sensex and the Nifty represent large-caps, the correction could be much deeper in mid- and small-cap stocks.

The expected range for the Nifty for the year is between 11,200 and 8,500. The outer boundaries are 12,300 and 7,800.

The range for the Sensex is between 38,000 and 27,800. The outer levels are 40,000 and 25,800.

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.