By Mazhar Mohammad
It was nothing short of a Chartist delight when I discovered breakouts across the time frames as I delve through historical charts of different indices. The conclusion? Each time frame chart was throwing up its own target for Nifty50.
On daily time frame target was 11100, on the weekly chart, it is 11533, monthly chart it is 12005, and on the quarterly chart it was about 13,500 on the Nifty50.
This bull market which was till now dominated by a handful of sectors with minimal contribution from pivotal names like IT, Pharma, Capital Goods, and Metals are suddenly looking much stronger and robust with broad-based participation as leadership appears to be changing from Financials to IT and becoming much wider.
Besides many sectors which were lagging till now have either registered breakouts or on the verge of a breakout on the longer time frame charts which shall facilitate Nifty50 in achieving bigger targets.
Is it possible to deliver 20% return year after year?
Now, the moot question to address whether this kind of lucrative target is possible after registering 28 percent gain of last year is possible. For that historical data has the perfect answer.
In the last bull market of 2003-2008, the market registered a gain of 40-45 percent every year for the next three years in a row from the year 2005-2007.
In the bull market of 1990s market saw a minimum 30 percent gain for consecutive years of 1990, 1991 and 1992 in a row. Before that, in 1981, the S&P BSE Sensex delivered 53 percent return after netting a gain of 24 percent in 1980.
Based on historical data analysis, it is clear that indices can post a decent 25-30 percent gain year after year. Hence, we can’t rule out the lucrative target of 13,000 on the Nifty just because indices already delivered a 28 percent return in the year 2017.
Technically, what gives confidence to me is the fact that index consolidated for years 2015 and 2016 and then registered a breakout in the year 2017.
This on longer time horizon should be read as a consolidation breakout which should pave the way for bigger long lasting up moves.
What is likely to contribute to the rally?
After 13 months of relentless upmove led by financials, things are changing fast. The participation is becoming broad-based. Pivotal like IT, Pharma and Capital goods appear to be coming back to life as IT appears to have taken over the leadership mantle for the time being.
Software behemoth TCS is leading from the front by hitting new lifetime highs in this sector which was otherwise out of favour and topped out way back in 2015.
Similarly, pharma index which also topped out in the year 2015 appears to be bottoming out and is on the verge of a breakout which will be confirmed if it sustains above 10,150 levels.
This breakout on the long-term charts is throwing up a big target of around 12,060 which is a gain of 18 percent from breakout points.
From the old economy, L&T and JSW Steel hogged the limelight with new lifetime highs whereas Tata Steel is yet to catch up.
Metals which were reeling under bear market kind of scenario till February 2016 are yet to get past their 2008 highs and are 25 percent away from that coveted mark.
In this bull market, private bankers and NBFCs till now assumed leadership and delivered fantastic returns but some of the largest bankers in the country like SBI, BOB and PNB are still struggling and yet to deliver returns to their shareholders.
But, fortunately, tide seems to be turning for PSU Banking space as this index is negotiating downward sloping trend line resistance on the long-term charts for last 4 months and appears to be on the verge of a breakout.
Once it manages a sustainable breakout above 4000 levels it will have a long way to go with a decent appreciation of 20 percent which should lead it closure to the test of 2010 highs.
What about Valuations:
It is rightly said that ‘Value’ lies in the eye of the beholder. The market may definitely look expensive on the back of historical figures like PE Ratios/ Book Values/Dividend Yield etc.
There were instances when Indian Markets traded at a historical PE of 34x in 2000 and at a PE multiple of 50x plus in 1994 and in 1997.
Hence, a Historical PE of around 28x at current levels may not be expensive for the smart money which is chasing the stocks at these levels hoping that
earnings will eventually catch up.
Who knows, George Soros’s Theory of Reflexivity may be at work which should eventually impact fundamentals in a positive fashion going forward.
Critical Technical points to be watched:
The key issue to be addressed is about the direction of the market in the near-term which is looking very tricky at this point in time as markets are defying gravity and trying to sit in their own orbit.
As there are breakouts on the long-term charts post-budget if the market sustains above 10600 levels market can retain its positive momentum over the medium term.
However, significant damage to the current bull market will be done if Nifty50 closes below 10300 on the monthly closing basis.
From Elliot Wave perspective, it looks like the current leg of rally from December 2016 lows of 7893, in a very long-term bull market, is wave three which based on our observations, should top out somewhere between March to June of 2018 thereby paving the way for multi-month correction in the form of wave 4 which when culminates pave the way for final leg of bull market.Disclaimer:
The author is Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in. The views and investment tips expressed by brokerage firms on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.