The Search for Wave B

05 April 2020

The Search for Wave B

"To be, or not to be, that is the question: Whether 'tis nobler in the mind to suffer; The slings and arrows of outrageous fortune, Or to take arms against a sea of troubles." - Hamlet - William Shakespear

The first wave of selling, in the greatest bear market of our lifetime, is in the final stage of this move. We will call this wave A. What will follow will be wave B up that will be the most significant retracement of the bear market that none might feel is possible anymore. Among the bulls by the end of wave B they will rejoice the return of the bull market because of the sheer size of the move and that it will be backed by central bank stimulus and fiscal stimulus. The problem with B waves is that -

“B waves are phonies. They are sucker plays, bull traps, speculator’ paradise, orgies of odd-lotter mentality or expressions of dumb institutional complacency [or both]. They often involve a focus on a narrow list of stocks, are often “unconfirmed” by other indices are rarely technically strong, and are virtually always doomed to complete retracement by wave C.” – as quoted from - Page 81 Chapter 2, Elliott Wave Principle, on Wave Personality.

So you know how the second half of April might feel like and maybe all the way into May’20. It is apparent that we are either in wave 5 down or wave b of B in case of an expanded flat both of which allow for a final sell off in key indices on the back of a narrower list of stocks lower volume and volatility but to possibly one more new low below 7511. If that happens, we may hit 7150 or even the 6825 swing low seen in 2016. The decline maybe wave B of a flat or expanded flat. In a flat the fall makes a higher bottom above 7511 and in an expanded flat it makes a lower bottom below 7511, eventually to head back to the 50-61.8% retracement mark at 10000 or higher.

The chart below shows the ideal set up for bank nifty. A slightly different wave count from the Jan 2020 top. It indicates that wave 5 of A is still forming and we may make a lower low below the recent lows before it is done. Later we may go for a wave B pullback to the 50-61.8% retracement marks near 24000 or higher.

What you need to absorb is that after this ends wave B typically sees a retracement of the fall up to 50% of wave A. In India I have seen the Sensex do 61.8% most of the time especially in the first wave B rally of a bear market. And yes that is despite the nature of the crash. What is not always clear is the time it will take. After the Y2K Bubble popped wave B occurred in April of 2000 and the 61.8% retracement was a 6 day affair as seen below.

In 2008 too after the Jan crash we were down 30% in days and hit the lower circuit, we then bounced back in wave B to retrace 61.8%. You may then think that if it was a deeper bear market that wont be true. This took 9 days. Equal in time to wave A down in time.

In the year 1929 when Dow lost almost 50% from the high in 2 months, wave B retraced more than 50% over 5 months as seen below. Moral of the story is that time is not always a factor. Logically wave B in most cases takes equal or less time than wave A, however it can also be longer if there is no liquidity. So by the end of May or June we we should complete wave B up if it starts in April.

A 50% retracement or more can mean going back to 10000 or higher on Nifty again. Many Midcap stocks will soar for a while and you will feel stupid that you did not participate in it as a trade. Some sectors might hold out too. As stated above by the end victory will have been proclaimed and no one will believe that wave C down to lower lows can ever occur. But that is just the nature of the beast. Long term investors and buy the dippers will boast of their bravery again. Buy and Hold and Sit Tight will come back as the Mantra. But it is not going to work. It did not work after Jan 2020, when Midcaps attempted to make a come back after a 2 year crash and failed miserably. By that it is now the longest bear market in Midcaps in recent history because it is now a higher degree market correction, a Supercycle degree event. So the bull on the chart shows that there was a positive divergence between the indicator and the Nifty in Sept 2019 before Nifty went from 10600 to 12300. But that rally was not big enough and now the divergence is broken with a lower low in the indicator. The real risk is that we will break the long term rising channel from 2009 for the ratio chart and Midcap under performance will go back to levels not seen since 2001. A cycle degree event is on.

Why? Because like it or not after years of ranting about the end of a Supercycle degree bear market in India, the bear market is here and now. The ending pattern from 2018 to 2020 is the stamp that I was looking for. It is a mirror image of the triangle that formed between 2001-2003 at the start of the bull market. Such patterns are the last and final turning points. In both there was a major divergence between the Nifty and the broad market. In 2003 the broader indices were not down there along with Nifty but rallied to a higher base. In 2018-2020 Midcaps were far lower than the Nifty diverging in the other direction. A simple way to see this divergence is in the Ratio chart of Nifty to Midcaps below. See the yellow indicator fly higher between 2001-2003 when nifty was just sitting there consolidating at lower levels. The opposite was true at the highs in 2018-2020. In Short 2001-2020 is the Autumn Bull market in stocks. I coined the term late Autumn bull market in 2014 when Nifty continued higher even as economic data was screaming economic winter. So while the winter in the economy was showing symptoms of the next turn lower years in advance it only hits the stock market in the last 2 years and slowly like a poison. 

The chart below is the original wave count that I considered way back in 2011-2015 where wave 4 is a triangle from 2010-2013 because all the moves appear 3-3-3-3-3, and not impulsive as many think. From the 2013 bottom it is possible to mark 5 waves up as shown. It is the most awkward period for counting and the 5^th wave is not in a perfect channel which is why it still concerned me. I  have found better alternate.

In Sept 2019 when I turned bullish the Long Short Report [LSR] then noted two alternates, the second being an ending diagonal up to 12300. In March 2020 I noted that 61.8% at 11600 broken confirms that the ending is in place. We were not able to get past 12500 and that puts the nail on the coffin. This is the chart from the Sept report.

Given the complexity of the counting in wave 5 above I later found that if I consider all the corrective moves from 2010-2020 as part of an ending pattern as shown below then wave 5 is a multi-year ending diagonal A-B-C-D-E where wave E itself ends with an ending diagonal from 2018-2020 [as above]. This sums it up as the best and easy to explain wave count. Many analysts mark 2010-2020 as 1-2-3-4-5 and while it can be argued, my daily wave counting along these years makes me more convinced that most of the rallies are corrective in nature and not impulsive. As seen above the 2014-2015 advance during Modi 1.0 was 3 waves marked as i-ii-iii [see economic winter chart], so it was 3 waves and ideally wave C of the wedge as shown below. This is the wave count I will work with now. On this quarterly chart of the Sensex below we have now broken the trendline starting from the 1980 low. That is a 40 year trendline that we closed below for the Quarter ended March 2020. The rise from 2009-2020 was so slow that in the end we are  closer to the lower end of the channel than the top end. That is the loss of momentum in the 5th wave.

The Nifty monthly chart below starts from 1994 when the NSE came online and the wave count has a slight difference given the time period. Interesting is how the 2001 bottom was at a higher low than 1998. This represents what most of the brick and mortar economy stocks like RIL/ACC/Larsen etc were doing in the same time period that the tech bubble popped. Tech stocks were not easily included in the indices and therefore they do not reflect the complete madness of that sector. The ending diagonal on Nifty means that we can retrace 61.8% of the pattern down to 6175. Analysts on Twitter also asked me what they are aware of, that ending diagonals or wedges are fully retraced when broken. And that puts the impossible target for Nifty at 2252. The only factor that can keep the worst from happening is the various degrees of government intervention with inflationary policies. An economic winter means deflation and inflation is the counter acting force.

On the yearly chart we are at the end of the 13^th wave from 1978 where the Sensex data officially starts [13=5+4+4=impulse wave]. The quarterly candle is a dark cloud pattern. The size not out of the normal from a historical context. It appears so because the last 10 years involve the slowest advance in the Nifty on record. The slow pace means that a mean reversion in speed gives back 3 years of gains. In 2008 Jan the 2 week decline gave back 30% but only 3 months of gains. In 2020 we have given back 3 years of gains in a near 40% drop.

Because wave B so often gives us a decent retracement when asked the question on when to exit investments during my Mentorship sessions, I noted that if you are not able to do so in advance of a major top and do not want to do so till confirmed that a bear market is here, then wave B is a good place. A good retracement occurs. But what that did not account for is that wave A would be as big as it has been this time. Ideally you are mentally trained to act when levels are surpassed but that is not easy for all, especially to exit and reenter if wrong. As shown in the Dow chart at the beginning however, large declines do not rule out the formation of wave B, they still occur and that is what will follow this massive sell off this time as well. So you will still get an opportunity to prune your equity exposure in favor of other assets. But when we go back up there and sentiment changes will you be mentally prepared to take that call is the bigger question. At 10300 it will look like buying at 8000 and lower Nifty was the opportunity of a lifetime. I would agree except for my context of a Supercycle degree bear market where wave C down is still pending for stocks and we do not know if wave C=A is the final target or wave C will extended. 

Modi will save the Day - A Socionomic perspective

I don't believe it that I'm using a political name as a headliner, but then wasn't my May 2019 long short report also titled "Modi bubble 2.0" , so for the 2nd or 3rd time I'm going to draw your attention towards my dejavu feeling about the BJP government's 2nd term. For those who have not been around long enough I will draw your attention towards BJP 1.0. It involved 2 terms by Shri Vajpayee. During his 1st term he conducted the Pokhran tests that were followed by US sanctions on India and a crash in equity prices afterwards. Later as sanctions were slowly lifted and the recovery started the momentum picked up in the midst of the tech bubble but also the announcement of a 2nd election. Months before the next election the Kargil border attacks surfaced and victory was declared. In October 1999 Shri Vajpayee was re-elected and the next 4 months the Y2K bubble popped and he had to sit through a deep bear market. While the government did everything in it's power to take measures that were forward looking and in the interest of the economy, the long duration of not just the decline but the time taken for the market to pick up again after 2003 meant that social mood did not change back to strongly positive enough again to re-elect him because it did not recognise the 'India Shining' campaign that he used. In other words the rise of BJP after 1996 occurred in the face of the economic summer bear market that followed the economic spring bull market. That change in mood shifted the vote bank. The BJP managed to consolidate the economy and bring it back on path for the bull market by 2003 but failed to get any credit for it.

With that come now to BJP 2.0 under the Modi government. The economic winter in terms of data and the debt laden sectors like power, infrastructure, capital goods, and other highly indebted industries started down from 2010 onward. This change in the economic period once again brought back a change in the political leadership in 2014. Despite the hit to markets from taking o NPAs, Demonetisation and GST, the bull market came back on global liquidity. Months before the next election the Pulwama attacks showed up and Shri Modi was re-elected in May 2019. Six months later the US equity market bubble popped, what some call the everything bubble, or may be more aptly the bond market bubble, because this period has been associated with the rapid expansion of dollar-denominated debt among corporates and emerging markets. So just like Vajpayee 2.0, Modi 2.0 now overlooks the most difficult and worst phase of the economic winter when stocks collapse in line with the economy. He will have to continue to take several measures to bring bring it back on track. The big difference he will have to make this time though, if re-election is sought, is to manage a turnaround in faster time and a loudmouth to manage to get full and complete credit for the pain that a supercycle degree economic winter bear market is likely to bring. The one word for this is simply deflation, where debts and past economic systems need to be overhauled so that a new economy can take birth. This is no easy feat and does not come without taking unpopular measures that can hurt in the near-term. Take for example the most recent cut in interest rates for savers at large across savings instruments that no one was able to do before.

The similarities above between these 2 periods when I put it this way is pretty amazing, and should throw meaningful light on the study of social mood and its impact on political outcomes. It is also amazing to see how long-term stock market economic cycles have been associated with the above political changes. Another surprising development that I published in one of my charts was the timing of the last visit by US President to India. Bill Clinton In March 2000 as the Tech bubble had started to roll over and Donald Trump in Feb 2020 Just as the recent equity bubble started to roll over. Now there are many other times US presidents visited India but these two during the BJP rule appear perfectly timed. If the mood of the moment had nothing to do with it then what else can you think of?

Measuring and Mapping the Stock Market Winter

Now clearly the economy and the stock market tend to diverge and in that sense the economy entered a winter much ahead of the stock market itself, though we can say that many sectors and Midcaps gave up along the way indicating the weakening trend in the market internals. When measuring the economic winter based on economic theory we will look at ratios like debt to GDP including both public debt and private debt, credit growth, the NPA cycle, the closure of bad debts, defaults and bailouts, a reset of the banking system, inflation/deflation and so on, many of which I discussed in the economic winter reports. To measure the economic winter in the stock market we may use several ratio charts and I will go over them today. Because the collapse in credit is a function of the excessive debt in the system it has a direct impact on inflation measures, which then have a direct impact on the currency. Combined both these factors have direct implication for hard assets like gold.

By now you must be knowing where I'm going with this. So the 1st chart that I'm looking at below is the Sensex adjusted for inflation. In short you can call this "Real Sensex". If you are seeing this for the first time then it will surprise you that we have not been able to beat inflation since 2008 in equity markets based on the underlying index. Now the entire interim period from 2009-2020 appears like a triangle in wave B and wave C should logically go below wave A before it is complete.The speed of the move so far like 2008 can mean that the move can complete in another year or so if the speed is maintained. I have been publishing this chart for years so old readers are finally seeing it play out.

The second measure is against Gold. The Sensex/Gold ratio is below. I am using MCX gold prices here so that it is truly reflecting the Indian cycle. It is amazing that prices have put to test the neckline so many times including at the 2009/2013 low. In that sense the recent 50% retracement into 2018 appears like a triangle in the right shoulder and we are now heading back to the blue neckline and should break it. The H&S pattern target should be achieved as we go back below the neckline to complete the cycle. Think of it as a SIN curve. [I mean SIN as in SIN/COS/TAN in math]. Here wave C down to the lower end of the channel is a conservative expectation, ideally a full cycle should be back to near the low end of the range. What this chart shows therefore is that starting 2008 Gold is outperforming the Sensex as an Asset Class for returns despite near term bumps, and will continue to do so for some more years ahead. This comes as a surprise to some especially because it is not in their thinking as an asset class. Others only see the dollar price of Gold forgetting that it also goes up in rupee terms when USDINR goes up. Gold MCX prices are now near an all time high. 

Lastly we look at the direct currency relationship. Sensex in dollars, or the Sensex/USDINR ratio. This one surprised me because for a long time the 2008 high was not surpassed. We did so in 2018 in the last part of the rally. Till then it looked like a near double top or like the charts above. Now the new high can be marked as the 5th wave with a small wedge and we are now back below the 2008 high, so performance is bleak for foreign investors who think in dollar terms about our market. Indian investors without having seen previous bull markets forget that the speed of the bull market since 2012 has been pathetic. I am used to seeing 30% of more volatility in a year but since 2012 even a 10% year was hard to come by and considered great. In fact we called it the new normal and maturity of markets. The collapse in volatility was not a miracle but a sad truth that only reduces the long term return potential of the economy. With volatility comes risk and with risk comes reward. You cannot change the risk reward relationship by lower the volatility. Learning to manage risk is part of business, or investing or trading. The magical moment of risk free returns from stock market has ended.

The three measures above then allow us to map where the winter is taking us and when it will end. Clearly wave C down in the first two charts is not complete as we are still to break the wave A low. This gives us time to reflect on the events in the economy and there is no hurry in calling a long term bottom just because the Nifty is at 7500. But you can call for a bounce. Because bounces are part of the game and bear market bounces can be sizable in the short term.

Sentiment at the Lows

Many of the Sentiment indicators are now off the charts and in that sense reflect that it is risky in being too bearish now at these levels. A relief is sought. The weekly RSI for example at 16 is the lowest in the history of the indices. The monthly chart of the Sensex below shows the RSI reading at 33, very close to the previous major bottoms at 34. So it is only hope that 33 will hold for a while. As of now every previous range is getting broken, and this too could be at risk. But the weekly reading could provide relief.

The Open Interest Put/Call ratio recently put in the lowest reading since 2017. It has been in this range for a while but when markets change cycles the ranges change as well. A new range can develop. Based on the previous range this is the most oversold reading. But if it declines further the PCR could go back to where it was at the 2016 lows. As of now it is on watch. What I can say is that PCR readings have become more volatile after weekly options came in as data expires every week as opposed to every month and that might limit the breadth of the moves seen previously in the indicator. So this oversold reading might be relevant as it is near where we were at 2 previous bottoms. If markets make a new low without a lower low in the PCR it may amount to a positive divergence too.

The 40 day A/D ratio is definitely doing what it did in all previous major bear markets. Falling right through the normal bottom end of the range as all stocks decline together. The readings far below the lower red line occurred only during the tech bear market of 2001 and the 2008 bear market, also in the flash crash of 2006. So that is where we are. So this extreme is associated with a bear market and at the same time with bear market bottoms. So we should be on the lookout for a wave A bottom based on this. A positive divergence will add weight to this view.

The volume PCR, looks at the volume of Puts traded v/s Calls traded and is a more medium term indicator. It was discussed in the mid of March because it was not yet reading at extremes even after such a big fall. I discussed the 40 day average of the raw data then, and it is still not near the highs. But now the raw data itself has some higher readings worth noting. A reading of 0.79 on 23/03 and 0.72 on 30/03 are worth noting from a historical perspective. The average of this data reaches an extreme above the red line at the final bottoms in a cycle, but the raw data can have several high readings where markets are due to bounce. the chart circles the most extreme readings in previous bear markets. So this is the highest reading since 2013. Finally buying Puts has become easier for most, a contrarian indicator.

The 20 day advanced decline ratio has fallen far below the lower red line for the first time since 2008. In the interim period for years readings near the lower lines signaled an oversold condition, and positive divergences or negative divergences with price action in the index are often seen before a trend reversal. The decline in the ratio so far has not developed a positive divergence here but will do so if prices make a lower low. The extreme reading itself at the fag end of this move means we should remain on the lookout for breadth to reverse. If it were any indication MidCap indices fell much less than the nifty in week gone by.

The recent decline has also led to a reduction in the total open interest in the futures market. This can be measured in absolute terms or relative to a broader index like the BSE 100. The open interest was diverging from prices ever since 2018 making lower highs versus price action. The relative chart shows that positions have gone back to the 2008 top in 2018. The idea of using the relative chart is to consider whether positions are equivalent to where they were in the past when compared to the rise in the index and not just the higher value of positions. On this basis it could be noted that at the 2018 top where Midcaps topped out traders were as bullish in index and stock futures as they were at the 2008 top. This is a slightly longer term indicator and should probably head to the lower end of the range and develop a positive divergence before you can call a final low for the stock market in the year or two ahead.

The FII and Client positions are not signalling anything right now except for one observation, the Net Position of FIIs was short in the second week of March and kept going down during the crash. Never seen that kind of behavior before. So on expiry day they were not short. But in the new series for April they started with a short position again, at -58,483 contracts on Friday. What I expect to see then is that they will be short again at the new low in the Nifty in the coming week and it might amount to a positive divergence in the data relative to the index. If that is visible I will post an update. As of now the lack of positions at the start of the new series was bearish as an indicator near term and that favors wave 5 or wave B of an expanded flat to a new low.

Broadly speaking it is clear that most sentiment indicators are oversold but what might be missing is a positive divergence of some kind that can easily develop if Nifty makes a dip below 7511. That is the ideal situation, but not necessary. Once we do get a reversal in price action it should bring relief to all the indicators in a wave B advance and create the room needed for wave C down later.

We are not Alone

Global equity markets also went on to confirm with monthly and quarterly indicators rolling over to the sell side. The Nasdaq composite that was the center of the bull run in US stocks broke the rising channel and last week only pulled back to test the lower end of the channel. These breaks are across US indices.

The long term chart of the Dow from 1932 shows a channel that has held price action all along with 3 test at the top end in the last decade. The quarterly chart shows the momentum indicator crossing over to the sell side again after a negative divergence. If prices just go back to the lower end of this long term channel then we end up at 8000 on the Dow.

Where goes the Dow goes the world index, that is now in a strong wave C bear market. It will subdivide into 5 waves. We are in wave 1 of 3 inside of wave C. The next bounce in world markets when it occurs will be wave 2 of 3. Until we complete a 5 wave decline the bear market in global equities is not over and therefore might have a long way to go.

A closer look at the weekly chart of the ADR index shows that we may have started wave 5 down of the current decline that should complete with one more new low in the index. I may mark the current fall as wave 1 of 3 as discussed above or alternate a as wave 3 itself. The final marking will depend on how much time we spend in wave 4 consolidation and the depth of the retracement.

The DJ Euro Stoxx 50 index reflects the break down in European Indices. After multiple attempts to break out of the top end of a falling trendline and a final false breakout we are back in a down trend that could go back to the trendline of the lows at a new low below the 2008 low.

The trouble in Europe however is not at the center with Germany but with the periphery. In 2010 I published often the chart of Greece as it was in a larger wave C decline and that ended with its own bailout. The first rally from there was 3 waves up only, and I noted an ending pattern may form. It now has a clearer look of an ending pattern. Still to go back to the lower end again.

Since Greece was bailed out once and put into austerity it was the turn of other markets to show wave C breakdowns but it took a long time for that to happen. Spain is next and I thought the 2015 top was a wave B triangle and complete. Even though we have not gone above that high prices did not sell-off sharply as they do in wave C. In hindsight now the entire pattern looks like an A-B-C structure, where wave C is the triangle as shown by the yellow trendlines. We have only started wave C down now and the previous low near 500 appears a psychological objective, unless wave C extends.

Italy is now in the eye of the storm. After years of being in near recession and high on unemployment, the stock market held on to wave B. I thought the triangle in wave B completed in 2018, but it managed to come back once more. Now wave B maybe an A-B-C just like Spain where wave C is a triangle itself. The big picture does not change and now wave C down of the bear market should have started. Then it cannot end at this level. Wave C should be equal to A and go far lower than the low of A eventually. 

It is clear that Europe remained largely in a bear market since 2008 except for the frontier markets like Germany, Britain and Switzerland that made new all time highs. The peripheral markets and the combined Euro Stoxx 50 index reflect that 2009- 2020 was wave B and we are now in wave C long term, of a bear market. For Europe wave C is the final wave down and therefore it puts it ahead of other markets in completing a long term A-B-C decline. What it does not tell us is how their debt problems will actually resolve to end this phase.

Eye of the Storm

Every discussion on global macro start with the dollar and there is growing evidence that another dollar bull run has started. The trend is very apparent in the emerging market currencies basket and less apparent in the developed market currencies basket. That said all the recent central bank action has created gyrations on both sides of the dollar index, but at the end of this week the weekly momentum still remains in bullish mode for the dollar index and therefore it is too early to say that the central banks have regained control over the dollar's move higher.

In a recent video I discussed my previously published dollar crisis chart that indicated 2 phases of the dollar crises that occurred during the 1990s. The 1st phase led to the south-east Asian crisis. The 2nd phase involved LTCM and eventually the popping of the tech bubble. Starting 2011 we have on our hands the 2nd dollar crisis This time around the 1st phase of the dollar crisis in 2016 again caused emerging markets and specifically commodity producers to come under pressure. While the big ones survived the stress test including Brazil and Russia, the bigger negative fallout was seen in places like Venezuela and Turkey. The 2nd phase of the dollar crisis may only be starting now the dollar index attempting to breakout above the 100 mark. Like the last thing this has caused the popping of the equity market bubble in the US and should lead to a wave 2 correction in gold.

In the recent period currency devaluations by lower interest rates and expanding bond buying programs has become common place around the world. This is a rare event in which everyone is attempting to devalue at the same time. This will not result in any net gain with trading partners but the objective is to get the domestic economy kick started with some kind of stimulus. With trade at a stand still it is not clear how this will work in the short term. What it has done though is sent the MSCI Emerging markets currency index into a tailspin. The chart below shows that a 3rd wave started in the currency basket and has still a long way to run before it is complete.

So how far will the dollar index go? With everyone playing "beggar thy neighbor" in a currency war? The dollar index which reflects multiple cross rates is getting pushed both ways making it difficult to come up with one very strong view. Even then momentum indicators point higher and one simple objective near term could be that the dollar heads towards 110 near the trendline of the last 2 highs. Eventually such a setup may end up looking like a wedge formation and I may consider it at that point of time. 

The currency pair that concerns us most is the USDINR. A long term 5th wave started from the 2018 bottom of 63.24. We are now in wave 3 of the 5th wave that is subdividing into a 5 wave advance. Within that 5 wave move we are in late stages of the 3rd wave. Once complete a 38.2% retracement can occur which could come at 74.25 from the recent high. Eventually wave 3 circle could be equal to the 1st wave near 80.50 or in the case of an extension it may go up to 161.8% of wave 1 all the way to 88.16. What if wave 3 itself extends? Then it is another ball game altogether.

The direct impact of all this is on commodities prices and the chart of the CRB index shows that we are in wave Z down and that breaks up into A-B-C. Wave C of Z down is forming and breaking up into 5 waves. The 4th wave is now forming in the recent bounce in oil and copper. Wave 5 down should soon occur in a final wave of selling for the sector. After that it may be worth considering for the nth time as to whether we have a bottom in commodities prices and if another reflation/stagflation trade is at hand.

Gold starts down in wave 2 in dollar terms. As long as the second dollar wave is in force this correction in gold should continue. There is no time estimate for this. Prices and sentiment readings have served us well before and will do so again. Wave 2 can go to test the broader channel line near 1350 or 61.8% retracement near 1370. Once complete wave 3 up will follow. But all this is part of a larger 3rd wave up that has the potential to carry even higher where 3=1 goes to 8000 if the wave count below is true. This view goes wrong only if we go below 1160. Till then there is no change in the wave count.

Gold Mcx prices have responded better because of USDINR and will continue to do so. Gold MCX prices should rise making higher bottoms as they reflect weakness in the currency as well. Gold in rupee terms remains in a bull market with brief corrections for this reason. Wave wise we are in a long term 5th wave and within that wave III up is going on and can continue toward the top end of the first channel near 65000.

Silver prices are at risk of a lower low then. While Silver did make a lower low in the previous dollar crisis period, I did not anticipate it will do so again this time because of my earlier dollar bearish view. So silver is under performing relative to gold and may continue to do so as long as the commodities bear market is on. The wave count maybe similar. A-B-C down. Then wave 5 of C down is still pending. A new low below the recent low of 11.61 is likely. Will it go as far as to retest the 2008 low of 8.42? For now do not rule anything out.

Final comments

For those wondering what about bank nifty. The long term wave count maybe as follows. Wave 5 is an ending diagonal just like we saw in the case of Nifty. As the wave A decline continues wave 5 of A to a new low is likely in bank nifty. What we cannot rule out is that the fall will extend to the previous swing low near 13400 last seen in 2016. After that wave B will be a right shoulder.

The case for Stagflation

I have noted that many markets might have pending 5th waves down, it is visible either an individual stocks or in particular commodities. I have also noted that there is a final wave up in the dollar index. The timing of all these events may determine the final outcomes. For example if we get the combination of a 5th wave in commodity prices and a new low in equity prices then we are completing wave Z in the CRB index and possibly a low in oil, at the same time as wave A down ends in equity prices. The question that arises, is 'Is the next phase the eventual threat of stagflation'. If the dollar spike occurs quickly and commodity prices are in a selling climax then the next end result will be another decline in the dollar and a complete reversal in commodity prices from down to up. When this accompanies a B wave rally in stocks it results in stagflation. A period of slow growth and high inflation in prices from all the stimulative action that central banks have already taken and will continue to take. This is a potential scenario that we will keep our eyes on as the above trends play out.

The case for hyperinflation

The thought may have crossed your mind as to whether all the money printing will eventually result in hyperinflation in some or many of the financial markets around the world. It is often quoted that all inflation is the result of monetary policy. It has also been noted over the last several years that the failure of inflation to take off in the recent period has to do with the velocity of money. Some of these arguments may be true but there maybe a third one that really plays the real role in whether the outcome is stagflation or hyperinflation. This has to do with the general mood of business and how they respond to a tough environment. Imagine yourself as a producer that needs to stay afloat, and if you can't do so at current prices you only have 2 options. The 1st option is to shut your shop and the 2nd one is to raise prices. The cycles are pretty much part of the commodity price cycle where falling prices result in the closure of many production facilities and by that eventually drive prices higher. In my mind if the cost of doing business has gone up you are simply going to charge a higher amount for the goods and services you produce. When demand is high and economies of scale are at work it is possible to work with thin margins, however a slowing economy makes that difficult as lower demand results in higher input costs that need to be passed on. The direct result of stagflation. In this environment if interest rates are also raised to fight the inflation it become a part of the cost structure and results in still higher prices. For this reason raising interest rates fails to work immediately. In short the pricing pressure accompanied by either demand shocks or supply shocks can result in a hyper-inflationary environment, otherwise it may simply die in stagflation.

In the current context the larger risk is that any hike in interest rates will also prick the multiple bond market bubbles that have been built out there and can eventually take us from stagflation back to deflation. All I can tell you is that central banks have a tough job ahead of them in managing this razor thin risk between multiple heavyweight forces. My task is simply to remain on the lookout for any major trends that develop in the coming months. The major trend today is that of an ongoing deflation first till a complete wave 5 down in commodity prices is done. Once done, I will be on the lookout for a possible reflationary trend. The dollar index and its sentiment readings at that time might also help in understanding the situation. Do not rule out even bigger central bank or fiscal action when that happens.

Conclusion

The nifty and bank nifty are in late stages of the decline that started from January. The odds are that they will have one final selling climax and complete wave A down in the coming month and then start off on a wave B retracement rally. History shows the potential for a 50% retracement or more when that happens and it may be a good trade as we head back to 10,000. However eventually wave C down will make a new low below the low point that we reach this month. If commodity prices also complete their 5th waves down at the same time the net result might be stagflation and higher interest rates. The stagflation itself might be the trigger for wave C down to start later. The long-term outlook for gold [especially in rupee terms] and USDINR remains bullish.