Technically speaking

If the Sensex crosses 13K, trust the benchmark to rally once again to vertigo inducing 25K levels within a couple of years. Otherwise, be satisfied with modest gains or even some losses.

Stock markets are in the habit of changing course suddenly. The sharp fall since May 11 and the remarkable bounce back thereafter took most investors by surprise. And last week when the Sensex came tantalisingly close to kissing 13K, and investors were gearing up for another runaway rally, the benchmark index shied away only to deceive investors.

A week of lackluster performance, and the big question is whether stocks would rally further or lose momentum once again. Fundamentally, stocks appears to be on a firm footing with corporate performance bettering analyst estimates even in this quarter.

Based on trailing 12-month earnings, Sensex is trading at a price-earnings multiple 21.96 times. Building in a 15 per cent growth in earnings in fiscal 2008, the multiple stands at 17 times, which is not cheap.

But markets do not always toe the line defined by fundamentals and valuations. And that is when it becomes important to look at signals coming from the charts. As we step into Samvat 2063, here is what leading technical analysts have to say about the year ahead.

25000 BECKONS
Milind Karandikar
At high altitude, many develop a fear of falling or crashing to the ground. That is exactly how investors in the Indian stock markets are feeling now. The recent rally of more than 3000 points in the Sensex has left everyone in a state of awe.

All those who were skeptical about the benchmark index crossing the May 2006 high, have been forced to change their stance. Stock valuations that were touted to be overstretched at 9875 levels in June 2006 are now looking justifiable. Now everyone seems to be shifting focus from short-term to the long-term India story.

In spite of the index being at an all-time high, the market mood seems surprisingly subdued.

Analysts are advising investors to be very cautious, to stay in cash, and wait for the markets to correct before considering further investments. However, the markets seem to be in no mind to correct. Let us take a look what the NEowave pattern has to suggest at this point.

Technical outlook: In my last article in The Smart Investor dated May 29, 2006, I had mentioned about a large X-wave developing from May 2003. The X-wave is a seven-legged diametric formation.

When I wrote about it in May, we were in the sixth leg, called wave (f) of the formation. Wave (f) began at the top of 12671 of the Sensex on May 11, 2006 and was developing until recently.

Now, let us take a closer look at this wave (f). This seems to be another diametric formation with seven legs A, B, C, D, E, F, G (See Sensex daily chart). Wave A was the most violent covering a price of almost three thousand points in just seven trading sessions.

All the downward waves thereafter i.e. wave C (2188 points), wave E (1067 points), wave G (550 points) have covered successively smaller price territory. On the other hand, all the up moves i.e. waves B, D, F have covered larger price. I think this behaviour indicates precisely which way the markets want to move and that is obviously up.

Remember every future market action affects the present price pattern, especially near its termination. We observe that wave G of this diametric formation has ended higher compared to its beginning, creating a running pattern that indicates tremendous strength in the rally to follow.

This rally i.e. wave (g) seems to have already begun with a bang at the bottom of 12315 of the Sensex on Friday, October 13, 2006.

Investment perspective: Diametric formations are new psychological patterns discovered by Glenn Neely in recent times. Not much is known about these patterns yet.

Usually there are time similarities in its waves, which have been observed in this entire formation from May 2003. Waves (a) and (g) are usually similar in terms of price also. The index could go to dizzy heights of 25000 in the next 18 to 24 months, if we project wave (g) in line with the wave (a) movement. In terms of number of points this would be the biggest ever rise in the Sensex.

Under this scenario, almost all sectors would generate investment opportunities for the next couple of years. It seems, right now, that sectors like banking, cement, and auto ancillaries may outperform. Of course, the bullish fervor would spill over to many other sectors also.

As I said in the beginning, with the indices scaling new highs, market participants are fearful of a crash. Till the time majority of participants has this fear, the market would continue to scale new peaks.

One word of caution: Remember that the market is supreme and would decide its own course. If the upmove from 12315 to 12994 is completely retraced, then my interpretation is wrong. However, if the market crosses the 13000 mark again, then my analysis holds good.

The author is a NEowave analyst. He can be contacted at milindkarandikar@mtnl.net.in or karandikar.milind@gmail.com

25 PER CENT UP?
Devangshu Datta
Has the market reached that stage of the cycle when it pays to be contrarian? On the face of it, everything is fine. There's been a strong recovery after the market crash of May-June 2006.

The Sensex has soared to new highs and the Nifty has also closed at a new high although it hasn't broken its intra-day record of May. Since January 1, the Nifty has gained around 30.8 per cent in rupee terms and has risen about 43 per cent from its mid-June low of 2595.

When we look a little deeper, the situation actually looks ripe for an intermediate correction and quite a powerful one. Several of the classic signals of bull-market reversals are apparent. Breadth and momentum both seem weak.

1) The market has narrowed - declines have tended to outnumber advances in the run up of the past few months. This is reflected in the relative underperformance of the broad BSE 500 index. While the narrow Sensex has risen 46 per cent from the mid-June lows, the BSE 500 has climbed 45 per cent and at 4866 points, is trading significantly lower than its all-time high of 5069 in May 2006.

2) Volumes have dipped. In comparison to the huge volumes generated in March, April and early May, current trading volumes are lower. Market participants can be broken up into four major trading blocs. The FIIs are still buying but they tend to ease off in the October-December quarter as the year draws to a close and performance bonuses come into consideration. Mutual funds are negative in their stance. Traders and operators tend to go on holiday post-Diwali. So we don't see an immediate rise in volumes.

3) Momentum signals have weakened at the weekly and monthly timeframes. There is a negative divergence in that long-term momentum indicators. RoC and RSI were much stronger in early May than they are now.

4) Everybody is now expecting spectacular earnings growth after a great Q1 and excellent "early-bird" results in Q2. Those expectations could be dashed if some of the forthcoming results are actually disappointing. A contrarian would say the market is expecting an unending stream of good news, which is unlikely.

Put it all together and it adds up to a high probability of an intermediate downtrend towards the close of 2006. A dip of 10 per cent or so till primary support at around 3400-3450 would be likely.

The anticipated buying at 3400 levels would keep the market from falling any further. If the support at that level did break, we could expect strong support at the Nifty 3100 levels, which is where the market would land if it fell by roughly 20 per cent.

Looking at the longer-term of 12 months, there could be a case made for prices going either way. My take is that there will be net gains. This is against the statistical odds because India has not had a four-year-long bull market. But there does appear to have been a paradigm shift; the rallies have lasted longer and the dips have been short, if sharp.

It's difficult to make upside projections with the market already trading at record highs. The last set of projections have already been hit or exceeded. Sticking one's neck out, we may say that Nifty could top at 4600-4800 by Diwali 2007.

That would be the extreme range of predictions - a dip till 3100 or a rise till 4600. The implication is that the market could move about 25 per cent up or 10 per cent down.What about specific sectors? The two positive drivers through most of 2007 are likely to be IT and banking - the latter has delivered a very strong performance through the past few months. IT stocks underperformed the broad market until May 2006, but now appears to be catching up.

(The author is an independent analyst. He can be contacted at devangshu@gmail.com)

1500 POINT CORRECTION
Deepak Mohoni
Over the last six months, the market has not only moved into uncharted territory, but also behaved in a different manner. Investors should therefore adopt a flexible strategy rather than committing themselves to any specific target for the next year.

The biggest change that has taken place in the Indian market is that we are now following global trends rather than local factors. All our moves of the last year or two have coincided perfectly with those of other markets. We are thus dealing with global investors now, rather than the familiar local ones.

When it comes to global investors, it is worth noting that the popular perception that India is the number one favourite of global investors is exaggerated, when measured by the actual performance of global markets. Since the start of this calendar year, the Sensex has been beaten comfortably by several emerging markets - including China, Indonesia, Venezuela, Peru, Poland and Russia.

This is important, as it tells us that funds are not likely to selectively remain invested in India in the event of a global market downturn. We saw this when the Sensex fell along with other global markets from its May 11 top of 12,671 to its June 14 bottom of 8,799 - a short bear market that resulted in a loss of 31 per cent for the index.

At the moment though we are back in a bull market. The May-June bear phase lasted barely six weeks, but the 31 per cent drop in the Sensex was in keeping with previous bear markets - although those had lasted considerably longer.

Several stocks - particularly mid-caps - lost over 50 per cent in those six weeks, and there can be no doubt that we saw a genuine bear market, rather than just a heavy bull market correction.

A key factor to bear in mind is that similar bear markets started all over the world in May-June, when the Fed raised interest rates for the sixteenth time since June 2004 to five per cent level. All these bear markets bottomed out once the interest rate hikes stopped. Clearly, interest rates are the driving force for world markets at present "� even more than crude oil prices, growth or inflation.

Returning to the present situation, there is no way of predicting how long this bull market will last. If it lasts another year, we will certainly see much higher levels in all the indices. However, given that the last bear market was very short, we may just be going through a phase of high volatility in which the market makes huge swings in relatively short time spans.

The next market correction will provide more information about the nature of the current bull market. If the Sensex loses a relatively small part of its recent gains, then the possibility of a sustainable bull market will be much higher. A fall of even 1,500 points from the current levels can be regarded as reasonable in view of the gains clocked recently.

The current bull market will end if the Sensex were to fall below its last intermediate (medium-term trend) bottom of 9,875. In all likelihood, we will see a higher bottom being established when the market finally corrects. In that case, the newly established level will become the new signal of the next bear market.

This bull market has seen the Sensex gain 47.5 per cent in three months, after the 6-week bear market that cost the index 31 per cent. As the table shows, the 31 per cent drop is fairly typical of bear markets. However, the six-week duration is unusual, as past bear phases have lasted at least three months.

The author is managing director trendwatchindia.com. He can be contacted at stocks@mohoni.com)