Tuesday 26 February 2008

Is the Bull run Over?

This is the question that i have been getting from all corners of investment circles and the answer to this question may also surprise you to some extent. This article is sort of a follow up to the other article “Sensex Crash of 2008, Why and How?” that i wrote a few days back. Much has already been said and published on these lines, but what does it mean Technically and how to concur if we are in a Bear trend now or not is the contention of this article.

Technically speaking Sensex is definitely at a very crucial level and the way it is behaving suggests a clear consolidation after the Big crash and bad january. One must however take into consideration that sensex has nearly trippled in the last 3 years and expecting anything more than that without a correction is asking for too much. It is like this, if everyone is a buyer becuase they think that the market is going to go up, which is what has been happening for the past few years then where are the sellers. For any system to work, you need to have an equal balance between buyers and sellers. Someone sells and hence others buy. If it is only a buyers market then the market will experience crashes and panic such as this one when Bigger players start to sell.

Ok, enough of the lectures let us get to the real meat now.

Technically sensex is still holding onto it’s lower trendline support from a medium/long term perspective and this is a good news at this hour. Another supporting factor is that under all crashing situations Stocks/indices tend to find support at major levels. In this case 50 Day moving average, which is the most widely used standard was NOT honored. However, the 200 Day moving average is proving to be a good supporting level as sensex has already tried to go below this 3 times as of this writing and was able to come back up from there. So, that is another very supporting point to a bull run. Relative strength too looks great on Charts as it has turned bullish along with MACD and other short term indicators.

Coming to the negatives, Long term indicators as a whole do not look so good. But again, one wouldn’t expect a lot without letting the dust settle down a bit. Then there is the Wave Theory, we have clearly completed the 5 Waves in the uptrend in the last 3 years from a longer term perspective. At the end of the 5th wave, sensex crashed. This is kind of scary because now we have a situation where we may potentially reverse the long term uptrend and bull market and on top of that the market too is not doing that good. If the market does in fact goes up and then further down, making it’s first downside wave then we will get a clear confirmation of a downtrend. So, ideally speaking, sensex should move back up to 19K and the move down below 16.5K to complete the first downside wave. If this happens in the next few days/weeks, we can confirm the starting of a potential bear market. Any other moves by the sensex may not be a clear indication of such a trend change.

Now, moving onto other factors that influence the market other than technicals, there is Budget, US elections, global recession fears and more. During economic contractions money flow reduces and hence the investments. And since it is perceived that USA is already in recession, inflows into India are bound to go down and may even go out of the country as investors rush to safe cushions. Cash is the king when it comes to contractions and recessionary situations. Indian economy is doing great and will continue to do so, however it will react to the global slowdown. But since our economy is extremely contained, we should pass through all dolldrums without much concerns unless of course drastic changes happen on the Budgetary front.

Bottom line is that owing to Technical Analysis, Wave Theory and Global effects we may see a rough 2008 or at a minimum sideways moves. If one is in the market with great expectations, then please get real. This doesn’t mean you will not get opportunities along the way. Just that it will be harder to locate.