This Elliott-Wave expert sees rupee falling to 85, Nifty to 14,200 after pull-back rally

I will answer it in two parts, one is the short-term picture and the other is medium term. From April to June, we had seen a pretty prolonged decline. By the end of June, we were getting readings that show that the market had gotten pretty oversold, not just in terms of price value, but actually in terms of sentiment. The index futures position of FIIs (foreign institutional investors) had reached a short position of around 145,000 contracts at the end of June, which was the highest since the pandemic. Typically, when we get to a point where traders are that short, you do get a short covering technical rally in between. So, there is an indication of a potential short covering rally in the near term, therefore I don’t see an immediate downside. In the next one month, we could end up seeing a surprise rally, rebound in markets. Beyond that, we will be watching whether the market rolls over again and how far the upside can go. If you look at a 50% retracements of the entire fall, from the top of April around 18,150 to the bottom of 15,150-15,180, the level will be at around 16,660, and if it is 61% retracement, it would be closer to 17,000. So I'm sort of open to the idea that this rally stretches towards 16,600 to 17,000 on the upside in the coming month. If we don't get past those levels, then we would start anticipating the next move down, below where we really bottomed recently. Right now, I put the current worst-case scenario near the 2021 April low, which is close to 14,200.

In all, if we don't surpass the 17,000 in this rebound, then we could go down to 14,200.

Also read: RBI may shift focus to growth as inflation eases; no magic wand for rupee: SocGen's Kundu

Are you saying that we will see the sharpest pullback since the pandemic?

So it does not mean that it is sharp (pullback). It is often hard to judge if we will get that 50-60% retracement in a short period of time or over a slightly longer period. This is because it is based on the overall environment, like if there's a lot of negative news flow, it can be slow and painful with a lot of up-down moves or sudden sell-off. So, it need not be one way (movement). It can have multiple gyrations along the way. Usually, counter-trend bounces last around three to six weeks. From the bottom, we’ve already done four weeks and we are in the fifth week now. So we keep at least another week or two for it to complete.

When you do a net wave on different unconnected charts, for example, like in a recent webinar where you were connecting the commodity prices, gold, dollar and the equity markets, are all of them showing similar patterns? Or is there some lead-lag that is getting established?

Yes. When we look at bond, equity and commodity markets, the bond market is usually the first one to top-out or bottom-out, followed by equities and then followed by commodities.
If you go back a year or so, you will see that interest rates (in the bond market) started to rise (therefore bond prices began to fall) even before equities rolled over. Initially, when rates were rising, equities weren’t responding. Then you reach a point where equities give up (starts to fall) and commodities are the last man standing. A lot of money that shifts away from equities still stays in commodities. Eventually, commodities will roll over. This is the pattern we see in 2000 Y2K topping out or in 2008. Interest rates in the US were rising from late 2006. In 2007 October, the US equity market topped out; in January 2008, Indian equity market topped out; by March, it was gold; and by June-July, it was oil. After that, everything appeared to be falling together for a while.

In a rebound, bonds start on it first because the bond market is the first place the equity money runs to as a safe haven. Then, the bond markets bottom out first in anticipation that things are so bad that the yields will go down.

In the current situation, we are looking out for the topping out of commodity prices next. We are starting to see oil and energy-related stocks starting to roll over. So we are now at the point where equities, commodities, all start to fall together. In the short term, while we see this rebound (mentioned earlier), you might see a divergence, where falling oil is taken as a positive trigger for equity. But eventually, when the demand is contracting because of rising rates and liquidity contraction, you will see that commodities and equities are falling together. At that point, I would hope that bond markets bottom out because bond markets will take the signal that growth is slowing down sharply and therefore bond yields will start dropping. That will be the first time that we are in the last stage of this bear market. When the bond market bottoms out, then the selloff in equities and commodities will probably be in their final leg down or in their sharpest leg down.

Are you saying that equities and commodities are in a pullback mode, before the bond market gives the lead signal?

This time we are seeing an interesting divergence between metal and oil because of the geopolitical angle. In 2008, it was different, when oil was going up, copper prices were not going up but not falling too much; and eventually when oil fell, copper fell along with it. But this time, we have seen most metals have already fallen from April–US copper down, aluminium has crashed 30-40%--most base metals have already crashed. Therefore, it is very close to a bounce-back. However, oil is not looking the same because oil was very, very late to top out and roll over. Therefore, oil doesn’t look oversold in relation to copper. In the very short term, it's possible that there may be a divergence between metal and oil, which then would also be a contra opportunity. Equities are bouncing back and metal stocks may go up, but the oil and energy pack would be falling.

After the current bounce-back (to 16,600 to 17,000 till maybe the end of July) which takes us to the medium term, how long will the next wave last?

Usually, each fall and bounce-back runs as three months down and one or two months up, then another three months down. Two to three months is what we see each of the declining leg to take. It rarely goes beyond three months. So if the bounce-back lasts till the end of July, then (the fall) would be August, September and may be October. Those two-to-three months could be on the bearish side.

Are there any similarities in wave patterns this time to the patterns in 2000 and 2008?
I do see quite a lot of similarity of the NASDAQ structure compared to (what it was in) 2008 or even 2000. In the NIFTY, it looks very different from (what it was) in the two periods. So there is definitely a deviation in the way the two markets are behaving.

Also read: What explains the anomaly in Nifty, USDINR movements?

Is there a possibility of decoupling from some point?
We haven't really ever seen the two markets decouple, except in the late stages of a move. To give you an example, the current situation–from an economic perspective or from the way the dollar is behaving relative to the commodity prices or the (situation in) emerging markets–is a lot more similar to the 1997 to 2000 phase than 2008. Of course, that (1997-2000) is when you had an emerging market crisis, a rising dollar and the rising dollar eventually breaking the tech bubble. Then, you had a bear market. By then a lot of Southeast Asian markets had already been through a bear phase. In India, the core sector (apart from the tech sector) had a long consolidation phase around 1994 to 1998, and had just started to break out in 2000. We were actually in a much better situation in 2000 (though) we feel like we are in a better situation today.

Yes, I agree…at that time, we had enough places to hide as an investor...

But we still had to bear the brunt of the US bear market. I think we face a very, very similar situation. We have been through our banking crisis, we have our bankruptcy code in place, macros have improved, the debt levels in the banking and in the corporate sectors have cleared up a little bit… but because the world has got a cold, we are sneezing.
Back then, after the bear market was reached in 2001, we stopped making new lows till 2003. But the US continued to make new lows till late 2002. Then, after that, we both started recovering together. That was in the late stage and we call that more of an international divergence, it’s not decoupling, where one market continues to fall, the other slows down and then the other one or both begin to move in the reverse direction. This could happen in the late stages, maybe six months down the line.

Do your charts point to any islands or pockets of divergence?

There may be individual stocks (that shows divergence) not an entire sector.

In the last 10 days, we are seeing some interest coming back to FMCG (Fast-Moving Consumer Goods) whereas, for the last two years, that was one of the overvalued sectors that people wanted to move away from. On a 5-, 10-year basis, if growth really returns to the economy, then people generally tend to avoid the defensive FMCG space. Then, the sector goes through a long consolidation phase and ends up underperforming. So, I wouldn't take that kind of a long-term view on the sector. But, within that pack, I will name an individual stock, and it is not a recommendation because we don't really provide advice, but we are seeing a very divergent trend with ITC. It is actually doing much better than the others. So, maybe a handful of stocks that are outperforming but I'm not sure if you will get a particular sector as a whole.

The one space where people would look for relative strengths would probably be value stocks. By value stocks I mean those that are closer to book value and those that have dividend yields. They tend to fall less in a bear market.

Midcaps and small caps have been through a longer pain period. Do they look like there will be a different trajectory?

Typically, when midcaps top out, they go through a two-year kind of bear market, like it happened the last three times in 2010 to 2012, 2005 to 2007 and 2018 to 2020. Now, for midcaps, 2022 to 2024 could actually be a weak period.

In this pullback, do you think they could outperform?

Outperformance is measured in two ways, one is in percentage terms and the other is in retracement terms. In percentage terms, when something falls a lot, you may feel that it is rebounding on a particular day by 5%, 10% and so on. But, when we look at bear-market retracements, midcap indices’ retracements tend to be much smaller than the large cap retracements. If Nifty is expected to see a 50-60% retracement, then midcap indices won’t go beyond 30% retracement. So, retracement-wise, midcaps always lag behind the large caps in a bear market.

So the retracement will be lower and the pain period will be higher?

Yes, volatility tends to be higher because of the nature of the midcaps.

How do you see the pattern for rupee emerging?

In the very short term, the RSI (Relative Strength Index) for example on the USD-INR is around 78-79. Readings above 80 have led to a near-term correction. So, if there is a bounce-back in the market, USD-INR could cool off a little bit, maybe by 50 paisa or Rs 1. But, after that, 80.7-80.8 looks likely and there is a possibility that it goes all the way to 85.

What do you think are the reasons that the rupee has not depreciated significantly?

Rupee has not been depreciating (significantly) primarily because of RBI (Reserve Bank of India) intervention. With FII outflows, oil prices going up and our current account deficit, why else weren’t we going past the 77 mark, a peak we had made during the pandemic? My question always was when would the RBI really stop. The moment they stepped in and started to raise interest rates in May, I sensed that they're not going to intervene from now… maybe a little bit, but much less than they were doing earlier. That is the first indication that they are holding back.

Secondly, recently, they wrote a note about the potential risk of an outflow of around $90 billion. It was more an analytical note but it signalled that they were watching market forces now and using interest rate policy to let the currency find its place. That’s why you are seeing a faster move in the USD-INR because it’s adjusting to the market reality.