Advisor Speak Where can the Sensex fall to? Pratik Vasa Mumbai

Pratik’s last 2 calls made in Nov 2016 seem to have come good – markets found support where he believed they would, and markets rose subsequently to the levels he predicted, within the time frames he mentioned. In this edition of his technical perspectives on the markets, Pratik makes a few important points:
1. Historically, Sensex has made major tops at a trailing PE of 28. This happened in 2000, in 2008 and now in Jan 2018. A major top historically doesn’t set the tone for just a short correction, but a deeper downtrend – he sees the Sensex correcting to a zone between 27,000 – 30,000 and remaining range bound over the next 1 – 1.5 years
2. PSUs and Sensex heavyweights are unlikely to lead the next recovery. Money making opportunities are most likely to be found in select midcaps, rather than in largecaps.
3. Oil can trend up to US$ 80 and the dollar can move up to INR 67 during 2018 – both of which are not comforting possibilities for our markets

In my last article dated 18th Nov 2016 on Wealth Forum (Click Here), I had called for the SENSEX bottoming out at 25000 to 25500 levels and making a new high at 35 to 40k in 2 years. Sensex bottomed out at 25700 levels and we have seen a continuous rally till 36500 levels. The rally from 25700 to 36500 has been a channelled move and Sensex formed an Engulfing Bear pattern at the resistance line which was followed by a fast correction.

The channel support line is at 33500 which on breakdown will confirm a downtrend on the Sensex and we may see further correction. With Sensex closing on 7th March 2018 at 33,033, the downtrend appears confirmed. We should expect a further 10% correction from these levels to around 30,000, but more importantly, a range bound market for at least 1 – 1.5 years. First level of downside appears to be around 30,000 – which would be a 20% correction from the top of 36,500 and a lower level could be around 27,000.

SENSEX COMPARISON for the period 2015 – 2018

MARCH 2015 SENSEX touched 30k for the first time and today after 3 years we are trading at 33k levels which is 10 percent returns in 3 years which shows Sensex performance has always remained subdued after non-Congress governments get elected. We should be ready for the market to give up this 10% too over the next 1 year.

NIFTY P.E RATIO CHART

Historically Sensex has always formed a Major Top when Nifty P.E is at 28 levels.
Year 2000 NIFTY PE was at 28
Year 2008 NIFTY PE was at 28
YEAR 2018 NIFTY PE was at 28
My view on the markets with the recent corrections is to be cautious and not to go for bottom fishing. Avoid the temptation especially to go bottom fishing in PSU stocks – they are unlikely to lead a recovery any time soon. Buying strategy should be stock specific and should be focused only on stocks making higher top and higher bottoms. Regular profit booking will be important in a range bound market.

BSE MIDCAP

BSE MIDCAP INDEX is forming a higher top and higher bottom formation within the uptrend channel. The uptrend will continue as long as the lower support line is not broken. Midcap Index below 15300 will change the view to bearish. BSE Midcap index closed on 7th March 2018 at 15, 954.

There appear to be more money making opportunities in select midcaps than in large caps. Generally in times of corrections, the popular advice is to avoid midcaps and stay in largecaps. This may not prove to be an advantageous strategy over the next 1 – 1.5 years.

OIL - BRENT

As said in my last article Brent had taken support at 26$ which is 61.8% retracement of the 1998 to 2008 rally and should continue to go up to 80$ to test the 200 days Moving average. Crude will remain to be range bound with 80 on the higher side and 40 on the lower side. Going above 100$ looks difficult.

DOLLAR

DOLLAR has a strong support at 63.50 levels. The recent upmove in dollar has been a faster and we can expect a level of 67 for 2018.

Conclusion

Be prepared for a further 10% correction in market indices, and more importantly, a range bound market for the next 1 – 1.5 years.

Go contrary to the popular notion of investing in large caps during corrections – look for good midcaps that are making higher tops and higher bottoms.

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