A technical view on how the markets are likely to behave in the year 2002
Where will the market be in December 2002? Anybody who can predict this with certainty can obviously mint money! But human nature demands that this question be asked around the new year and one will attempt a "guesstimate".
Given the long timeframe, projecting price targets is fraught with many unseen perils. Technical analysis possess tools to attempt such a task but it is better suited to answering more general questions about prevailing trends than to projecting exact targets.
Long-term pattern
Let's start with something very simple. Take a look at the Monthly Sensex, which has been drawn from January 1992 to date. A couple of things are obvious.
The Sensex has wandered through a trading range in the last ten years. Despite seeing both strong bull and bear runs, it has rarely dropped below the 3000 mark and also rarely crossed the 4500-barrier on the upside (both projected on the charts as channel lines).
In a long-term perspective, the bull market of 1999-2000 can be seen as an abortive breakout from the long-term range trading pattern. The market tried to change the long-term pattern of behaviour and failed.
Also worth noting is that the market has rarely stayed at the bottom of this trading range for very long. Three-four months of consolidation has always been followed by a rise.
We have already seen several months of consolidation around the bottom of the long-term trading range. Assuming that the market holds to its long-term pattern, it will now try to move upwards. While there are specific resistances that show up on more detailed charts, an upmove towards the 4500 mark is extremely likely once a new bull market is firmly established.
Bear market behaviour
The second thing one sees is the likelihood that a long-term bull market has already been established. Look at statistical patterns in previous bear markets.
The Bear market of 1992-93 saw an April 1993 bottom of 1980 and a retraction of 56 per cent from the top of 4547 in April 1992. The bear market of 1994-1996 saw a bottom of 2713 in December 1996 and a retraction of 42 per cent from the top of 4643 in September 1994.
The bear market of 1997-98 saw a bottom of 2741 in November 1998, and a retraction of 40 per cent from the top of 4605 in August 1997. So bear market index retractions have seen between 40-55 per cent losses and bear markets have lasted anywhere between a minimum of 12 months (1992-93) and a maximum of 27 months (1994-96).
The current bear market had a bottom of 2600 in September 2001 and a retraction of 57 per cent from the peak of 6151 in February 2000. The retraction has been severe enough to suggest that this is a true bottom.
The time-period has also been pretty long- assuming September 2001 was indeed the bottom, the bear market had already lasted 19 months by then. It is thus very possible that the September 2001 bottom was the nadir and we are in the early stages of a new bull market.
Fundamental indicators: A reliable fundamental indicator like Price-Book Value also suggests that September 2001 represented a true low. The P-BV for the Sensex was below 2.5 for all of 2001 and down to around 1.7 in September 2001.
This ratio, often referred to as "Q", reverts to mean-values over long periods as was proved by Smithers & Wright ("Valuing Wall Street") in conjunction with earlier work done by James Tobin (who got the Nobel for it).
This is important. While stock prices can climb or fall indefinitely, markets don't behave irrationally for long. If prices climb in sustained fashion, profits must also rise, so must net worth, and the P-BV ratio will normalise. Different markets have different average values of q and an exact average value will always be a guess. The longer the time period under consideration, the more accurate the guess will be.
In the past decade, Q was highest in April 1992 at the height of the Scam at P-BV ratios of 10.25. It was lowest in October -November 1998, at levels of 1.67 with the market near a four-year low. At the all-time peak prices of February 2000, with the Sensex above 6000, Q was 4. By September 2001, Q was again at 1.7 with the market at a seven-year low.
Since 1992, in 70 per cent of all sessions, q ranged between 2.5-4.5. It stayed inside the range of 2.5-6.5 as often as 91 per cent of all sessions. Any q-value outside 2.5-4.5 is unusual while any q-value outside the 2.5-6.5 zone is extraordinary.
The market was indeed extraordinarily depressed in September 2001, which is a sign of a true bear market low. So we can hope that 2002 will see a price-recovery or a trading range rather than further falls.
Resistance levels
Let's look for specifics as to how high the market can trade. A look at the weekly Sensex helps locate likely resistance levels. We can divide the chart into several trading zones. Remember that when a resistance is overcome, it tends to act as a support.
These are the rough zones.
Zone one: The market could continue to trade between 3050-3450.
Zone two: The market could move into a zone between 3450-3750
Zone three: The market could move between 3750-4350
Zone four: The market could move ahead to above 4350, in which case it will test the long-term trading range outlined in the Monthly chart.
The Sensex has already been in Zone one since September. A climb into Zone two or Zone three is likely. Zone four is possible but breakouts about 4350 tend to occur only in the last phase of a bull market - in the 3-4 months before the next collapse.
So how long will the bull market last?To try and answer this question, we need to look at stats again.The 1991-92 bull market lasted from February 1991 (post Gulf War) to April 1992. The total gain was an extraordinary 362 per cent in 14 months.
The bull market of 1993-1994 lasted 18 months and saw gains of 134 per cent. The bull market of 1997 lasted just 8 months and saw gains of 70 per cent. The bull market of 1998-2000 lasted 15 months and saw gains of 124 per cent.
In each case, the pattern was similar. The new bull market started with 3-4 months of consolidation close to the previous lows, some months of steady gains and a 2-3 month feeding frenzy at the close. The likeliest pattern in an Indian bull market is over 100 per cent gains in a period that lasts somewhere between 1-2 years.
Let's assume that this pattern will be maintained. Then according to our assumptions, September 2001 saw the start of the consolidation phase - which has now lasted 3 months. We should now be moving into the period of steady gains. Any violent upsurges will not occur before the October-December 2002 Quarter if this market lasts over 1 year.
Targets
Unless this new bull market fizzles as in 1997, we should eventually see a doubling of index values and a bit more. Reasonable targets for the peak would be something between 5500-5700, which is around 100-120 per cent off the 2600 low. If the bull run does fizzle out, the index should still see a 65-70 per cent improvement on 2600 levels. That would be a target of 4350-4450.
Purely technical: Fibonacci time zone analysis suggests a major turn in market trend in mid-late January. This would tend to confirm the possibility of a strong bull market. A look at charts suggests that a movement above 3450 would lead to the 3750 level at least. At that point various positive patterns could be triggered and we could thus see a series of higher peaks.
Conclusions: Taking all the above into consideration, we can make some projections. The market should move up between January-December 2002. However it will not show extraordinary surges before the last calendar quarter.
If the new bull market fizzles, index values will not cross the 4500 barrier and we will see a top before September 2002-followed by a new bear market by year-end.
If the new bull market behaves normally, we should see a surge in either the last quarter of calendar 2002 or in the first quarter of calendar 2003. In this case, we could ultimately expect peak values in the 500-5700 range.
Inside Box
The Fibonacci time zone analysis suggests a major turn in market trend in mid-late January. This would tend to confirm the possibility of a strong bull market.
