The market appears to be in a correction mode after an 18 week upsurge that triggered a 30 per cent rise in Nifty levels. In theory, this is good news for the investors who can seek entry at cheaper levels. It is also good news for traders who are nimble enough to short the new trend.
How does one judge the likely correction and the time period of net losses? Several methods could be used. First, I'm making the assumption that overall bullishness hasn't vitiated; it has moderated. The long-term bull ma rket is alive; after a correction and profit booking, prices will move higher again, beating the 6,357 all-time high of January 2008.
In terms of time, the previous intermediate trend was up for 18-odd weeks. A correction should lead to net losses of anywhere between a fifth to the third of the same time period. That means, there could be net losses of anywhere between three and seven weeks.
This gels anecdotally with the known trends of Indian equity weakness around and post-Diwali. It also gels with political uncertainty in the US, where elections to Congress could lead to volatility on Wall Street and by extension in FII ranks. Since FII buying has driven the market up this far, FII selling or simple lack of buying could lead to the opposite results.
In terms of magnitude, Fibonacci calculations suggest that successive retracements of about 20 per cent or 37 per cent of the entire previous up-move. That's if it's a mild correction. Given that the last uptrend started at a low of 4,786 and ended at a peak of 6,284, that would be either roughly 300 off the top (5,984) or 554 points down (5,730).
The Nifty has traded extensively between 5,700 and 6,000 range, so the levels are plausible. The 5,984 mark corresponds to strong support, which has held through the last few sessions. A deeper 50 per cent retracement would mean a drop till 5,535. The 5,450-5,550 zone is massively congested. If bearishness persists beyond Diwali, a drop till that level seems extremely likely.
A trader should be looking for shorts, using these levels as rough benchmarks. The Nifty itself may not have much downside left unless the correction is severe enough to test 5,535. But, there are also possibilities of shorting stocks in sectors such as banking and metals that could lose more ground than the broad index.
From a fundamental perspective, the Nifty was trading at a weighted PE of 25.1 on Friday's closing value of 6,066. Hence, it would be at 23.6 PE if the market dropped to 5,730 and it would be at 22.8 if it drops to 5,535. Even 5,535 is not really attractive a PE discount for a value investor. It is still at the very top of PE valuation ranges that have been historically sustained.
The author is a technical and equity analyst
