Sensex - Long Term Technical View

To continue with my last post, I have presented the long term monthly chart of Nifty. In the given chart we can see that Nifty is trading within two equi-distance channel. The upper end of this channel (where the market faced resistance in January of 2008) is at around 22700.

Therefore as per the technical analysis the market will not move above 22700 on Sensex. This view is also supported by the current valuation which is near its all time high. 

Sensex Monthly Chart 1990 -210

We can also observe that this channel is not a very steep channel . So unless this channel is broken the upside in the index will be very limited. This implies that Sensex will either move sideways or will correct for next few years. 

The probability of any breakout from this channel is almost negligible, but if this channel break out substantially than the next target for index will be above 40,000. Looking at the global economic scenario this is a highly unlikely scenario according to me and the only reason why it may happen is in case of Hyper - Inflation. When a economy faces hyper-inflation the prices of all hard assets increases as the value of currency evaporates. This scenario is highly unlikely according to me. 

This is my preferred scenario where market will move side side ways between a range of 24000 - 12000 for next five years before it eventually breaks above the channel line and reaches 45,000 by the end of this decade

This is the alternate scenario. In this scenario Sensex will break above 22700 in next three quarters and will move up towards 40,000. I think this is highly unlikely event. 

In both these chart the chart which is plotted to the right side of the red line is predicted movement of sensex in the next decade. It is just for illustration.

We can see the similarity between the daily chart and the long term chart of Sensex. We can see that the channel support in Sensex is currently at around 17200 -17800 levels. After which the index may bounce up to 21500 -22000 levels.

Sensex Daily Chart

Looking at the given scenario I think Traders can go long on the market at lower levels of 5500 - 5400 with a strict stop loss of 5250 on weekly closing basis  and a target of 6600 on Nifty.

I would not advice investors to try and play the last leg of the market as its not possible to get out of the market at right time. As the some investor said (may be Warren Buffet) that "Every one wants to get out of the market just 5 minutes before the clock strikes 12.This is not possible. You have to get out of the market at 10 watch the market go up for next two hours and than crash"  

Tech Musings

Silver

Silver had given a perfect break out as expected and have reached 42,000 levels. In June 2010 when I wrote about silver little did I knew that the target will be achieved in five months. (http://stock- wizard.blogspot.com/2010/06/silver-back-in-action.html)

If we look at the given long term chart of silver we can see that in 1970 silver made a high of 50 dollar an ounce. I think the current break out of silver is very strong and it will take silver back to these levels. This implies that gradually silver will move up towards a target of 60,000 INR per K.G eventually in next two years.

Gold

Gold is forming a short term corrective pattern and I expect the commodity will correct in short term. If we look at the given chart of gold we can see the formation of a bearish pattern. If gold breaks below 1330$, it may see further correction up to 1250$ an ounce. I think long only investor will get a good opportunity to buy both precious metal in short term.

It would be difficult to comment on INR price level for these two commodities as INR seem weak and may correct up to 47 from here.

NIFTY

Nifty has weakened in November as expected in my last post. (http://stock-wizard.blogspot.com/2010/10/manufacturing-minsky-melt-up_31.html)

I was anticipating that nifty will come down to 5750 - 5800 levels. Nifty today made a low of 5780 and almost hit the level. 

If we see the intra-day chart of Nifty we can see that Nifty is also forming a bearish pattern and today the prices have closed below the trend line. If price continue to trade below 5800 for next two days I think Nifty will go lower towards a target of 5450 -5500

Traders who want to go long on the market can go long at these level by keeping a strict stop loss of 5250 on closing basis. If the market turns around from there the next target for Nifty would be around 7000 level.

Caution

Investors be aware that the real economy is facing insurmountable problems. Whether its European debt crisis, Chinese economy imbalances, slow US economic growth or Geo political problems they are here to remain. 

How the market works is that from time to time the market will become complacent and market participants will pretend that there are no issues and markets will move up. But ultimately with all these problems there is no reason why the markets should go up except if there is hyper inflation. 

Therefore anyone who is investing in Indian markets should be very vigilant. I dont agree completely with Indian growth story. As a country we have many overwhelming problems and I believe that they will spoil/slow the Indian growth story. 

My long term assumption is that the equity markets will make a new high in next year and then the global markets will crack. This may happen in six months or in next two - three years.