Fasten your seat belts... Turbulence ahead: ICICIdirect.com

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.

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).

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 chart (pdf attachment) 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. In 2012, if the Sensex hits the projected target of 12000-12500 levels amid extremely bad news flow, it would offer an opportunity for long term investors taking precedence from historical events.

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