For the S&P, a break below 3,800 really opens the door for a retest of the October lows which is around that 3,500 area. That is really where the risk of the Nifty retesting that 15,400 increased significantly on an S&P break of 3800.
For a market like India and you have tracked this market for years now, how many times have we seen this kind of a distribution/time wise correction in the last 10 years and what has happened after that?
Well, again if we just take a step back and we look how we start at the 2009 low, we had over 170% gain off the 2009 low. It peaked in 2010 and it took just over four years to consolidate that in a range and within that range, we saw price swings of 20% down 20% up and that took four years before you broke out in the first half of 2014. We then had a big run up of roughly 40%. You peaked in late 2015 and spent the next 12 months consolidating and then we ran up in a breakout in 2016, all the way through to 2019, before we got hit with the Covid correction.
So we have seen two major periods of multi-month trading ranges before the longer term uptrend resumed. And that is we have seen the third major trading range setup which has developed off the third quarter of 2021 highs and our base case is that this trading range probably lasts for another two quarters before we can look for a confirmed breakout and resumption of that longer term uptrend.
Where do you think the turning point for commodities will come? Crude is not at $130, it is already down from a bull market. It has moved to a bear market. Where is gold headed and where is crude headed?
Let us deal with crude first because last week, we did see a break below $18.40 which was a key short term support level that does now extend the downtrend that you have seen develop off the early 2022 highs and it suggests a move back towards the $65 area which is basically the lows that you made in the first half of 2021. That is the downside risk on the Brent side.
Gold on the other hand, has been in a trading range since August 2020 and that trading range has developed below this $2,100 resistance zone. Now the setup for gold is to at least test that area and a break above $2100 would give us a fresh upside target and breakout and give us a target level of $2,500 to $2,550. We have been watching gold quite closely for a break above that $2,100 area and a move up to $2,500 at the end of the day.
When we spoke at the end of last year, we were talking about a Nifty target of around 21,850 to 22,000 or thereabouts. Has that got shifted materially till the end of next year?
Yes, so I think as far as the time horizon goes the fact that we failed to sustain the breakout in December and the fact that we have pulled back into this trading range does postpone rather than negate that upside target. Like I said earlier on, this ranging action lasts another two quarters at least. So yes, those upside targets are pushed down the track.
You also talked about how India is going to underperform in the emerging market basket. What will hold up and would it be an obvious China trade that is going to work?
Yes, unfortunately, China makes up 40% of the EM index. As we broke out from the October lows last year, the mere fact of the gains that you saw in China had India underperforming, even though there wasn’t any meaningful breakdown in India, it was more of that ranging action. If you look at MSCI China or the HSI, you have been sitting on key support areas over the past two weeks and we started to react in a positive fashion to those support levels. A number of demarked signals have developed on that recent correction in the Hong Kong China side. We think there is definitely an immediate upside potential from these support levels in the Hong Kong China side. On a relative basis, we would see India underperform even though it holds in the current trading range.
So if one has to take a three-year view from here, let us say 2026, middle of 2026 or beginning of 2027, do you think for Indian equities, the long term charts still indicate that there is money to be made here? Will this market do exactly what it did after these brief patches of consolidation?
Yes, absolutely. The longer-term structure has not been damaged at all and this trading range would set up a platform for a resumption of that trend. In the short term though, it is more about swings and rotations within the underlying sector but from a longer term side, it is still a positive setup for a push through 20,000 and move up to the 21,800 area and potentially even higher than that.
So the longer term trend is still intact. It is just about digesting the gains of the 2020 lows and the common pattern has been a sideways range over a period of time.
You talked about the fact that 16,800 is a very key support for the index and you have highlighted your longer term upside target as well. But in this kind of a scenario, what happens to the mid and the smallcap indices? Do they drag more from even the current levels because they already have, even year to date or for that matter on a 52-week basis.
Yes, unfortunately, as we have seen in the US the smallcap side does underperform, typically falls more when you are in these corrective periods. So looking at the Nifty smallcaps and even the Nifty midcap side, you are seeing that relative underperformance and they are already back towards the lows that you saw in mid-2022 rather sitting in the middle of the range which the Nifty is.
We do not see any signs of relative outperformance in the immediate short term from that mid and smallcap space. We are likely to see further underperformance.
While you did talk about your upside target of 20,700, you are highlighting a possibility that a 15,400 number might be there on the Nifty as well. What is the probability of that?
That is really going to be dictated by how the developed markets trade and the 16,800 area we put to the equivalent level of 3,800 for the S&P which basically gets to December lows. So if you look at the S&P over the past four months, we have seen this trading range between 3800 and 4100. Should the S&P break below that 3800 area, that would increase the probability of a Nifty break below 16,800.
For the S&P, a break below 3,800 really opens the door for a retest of the October lows which is around that 3,500 area. That is really where the risk of the Nifty retesting that 15,400 increased significantly on an S&P break of 3800.
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