Vertigo - Addendum

03-03-20

More Than Meets the Eye - 

Today world markets have had their steepest rally since the Coronavirus started being openly reported by all Nations. And the reason appears hope that Central banks are finally stepping in. In today's note I will discuss the alternate scenarios and where we are also from a sentiment perspective. In publishing the Long Short report on Sunday night I did not cover my usual sentiment indicators and the earlier wave count so this might be a good point to complete the discussion.

Consider this an addition to the Already published 'Vertigo' so do read that along with this note.

My timeline of views

ALT 1 - in 2015, the 2008-2013 consolidation in markets as a triangle formation in 4th wave so the 2015 top is wave 5 over or wave 1 of 5.

ALT 2 - in 2017-2019, I considered an ending pattern forming in Nifty as it was ending a 5th wave supercycle degree provided I change the above count to an ending pattern from 2009-2018.

Sept 2019 - I go back to the 2015 wave count to consider that 2015 top was 1 of 5, then the 2018 top was 3 of 5 and 5 of 5 to new highs is pending. This was because Sentiment was the most oversold in a long time and a 2 year Midcap bear market. I left the ending pattern alternate open to consider later

Feb 2020 - We should get our first set back 50-61.8% retracement of the recent rally but could be wave 2 of 5 down.

Mar 2020 - We have fallen too far and momentum indicators on all time frames are in sell mode so maybe the ending pattern in wave 5 is complete as an ending diagonal. Social mood may change strongly negative to support this case. Final confirmation is needed in the form of a 5 wave decline from the Feb top of 12246.

Today 2020 - If the Nifty holds the 11030-10950 support range then ?

I was asked this question in the Mentorship program - How do we change our view? This is a Behavioral Finance question and not one to do with TA. The inability to hold an opposing view and especially accept it when it becomes true requires mental training. But the view should be supported by evidence. The end of a Supercycle is supported by Economic facts. The end of the rally in 2018 was accompanied by extreme bullish sentiment towards investing in MFs. Both are typical of major tops.

However today as we made one more new high in Nifty in May 2019 and then in Feb 2020, sentiment is actually less bullish than at any other major peak I have seen. My generation has been accustomed to see major market tops be accompanied by widespread buying in small stocks after which everything falls apart. 2018-2020 was in that sense unusual because stocks and sectors topped out before the Nifty. The only reason could be a longer term distribution process because of a longer term top.

The alternate argument however is only one. Go back to ALT 1, If wave 1 of 5 was the 2015 top and wave 3 was the 2018 top then the triangle over the last 2 years is wave 4, a running triangle and should be followed by a major wave 5 up.

So the top at 12430 was not 1 of 5 as believed in January, but D of 4, and wave E of 4 completes and the bulls are back. Can this scenario play out? Technically if the fall from the recent top does not form a 5 wave decline then yes it can be technically argued on Elliott Waves as correct. The lower trendline from the 2013 bottom is also at 10950 as a final level. If the decline however shows a 5 waves down as we have already seen on Bank nifty then the preferred view remains ALT 2 discussed in 'Vertigo'

So I do not think the above alternate is a very good one but will consider it as and when sentiment prompts me to. And this is what is getting interesting.

As sentiment goes from outright bullish to outright bearish we are getting repeated bearish extremes that are unusual at this level of the market. This can either mean two things. 

1. We are getting over bearish driven by news and events, that are causing markets to over react, Central banks will control everything eventually. My sense is that even if they intervene at these valuations they will only create a Hyper bubble, so if they do you have to participate till it ends. Nifty Historical PE remains elevated here is an updated chart. Taken from Vivek Patils weekly commentary. We have remained in bubble territory for longer than every before making us feel comfortable with the fact. You may use the word Complacency here.

 

2. Once we get a 5 wave decline, extremes in bearish sentiment will only give retracement rallies. And given that we are in a bear market we are going to get market declines even when we are in oversold zone so give more importance to the wave count itself. The extreme bearish sentiment might be a reflection of just how bad things are getting on the ground. This is true everywhere in the world. For example this chart of the US VIX, at 50% all market declines ended. So the US VIX is signalling that the worst is over and we are over panicking at near 50%. The Y2K bubble also ended with a reading that did not exceed 50%. In fact 50% was reached after 9/11 attacks. But the only time we went past 50% was the 2008 crisis. So we may pause at 50% for now, but after a market pullback if this level breaks, rest assured this is going to be worse bear market than 2008. But isn't that what you would expect after an "Everything Bubble" pops and the world has used up more debt than ever before in recorded history to prop up consumption business, share prices [with buy backs], bonds [with QE], so it was the endgame and only a matter of timing.

 

Here are a host of recent Sentiment indicators on Indian charts that might aid a bounce back either from 11030 or after we get our first 5 wave decline down to 10800 or lower.

20 day A/D ratio at the low end of the range, but it can fall below the red line clearly as done before so there is room to go lower. In fact at the last two bottoms we did get a positive divergence before markets rallied, right now we are just down and falling in the ratio.

 

But not the 40 day A/D, long way to go down. What is interesting though is that the 40 day A/D did not top at the all time high but at the lower high made in Feb, this maybe a reason that the market appeared strong to me on midcaps at that time. Also this is what we call a reverse divergence. Rare but it happened for the first time at a top.

 

Put/Call ratio again back to the low end where it reached first after the budget. But it is still slightly above that and at previous bottoms it fell below the lower horizontal line so it is bad but not extremely oversold yet. Note this is based on the recent range for the indicator and before 2010 PCR used to fall a lot more before getting oversold so range can change if the market trend long term changes.

 

FII % short ratio in the Options market and Futures market OI reaching a record high [as published in "Vertigo"], but below what i am showing is the entire time horizon. The total options and futures OI % long to short at the top and only options at the bottom. With most such indicators they follow a certain range for a certain time period but those ranges can change. After 2013 most readings at the inside grey line were oversold. but prior to that the readings did fall to much lower levels. If the market is changing trend at a much higher degree of time such changes will occur and what looks oversold might be the start of a deeper move. This needs to be watched out for. In the top end of the chart we did 40% short at the 2016 bottom and we are still not there.

Conclusions

Central bank intervention will remain a fear at the back of the mind that can extend bull markets meaninglessly. But once it fails to work then it takes a lot more action before it works again. The Y2K and Housing bubbles were followed by a series of rate cuts before a bottom finally came in. Then those cuts only aided hope rallied in between. Once I see a clear 5 wave decline in Nifty that is what we should expect. Same with the Dow. Till then you may worry a bit. But the gap down above 11384-11450 is a key resistance and what we call recognition point. The point at which the market recognized that we have a problem. So staying below that for now short term the odds are that wave 4 up and 5 down follow. Sentiment indicators discussed today are down but can still fall more if the market demands and this is not yet extreme oversold and we do not have positive divergences in them to highlight. This maybe a new world. If something change in the market structure and ALT 1 comes back miraculously we have a choice. The economic and social mood setup supports ALT 2. Meaning the end of a Supercycle degree bull market. For long term investors a 5 wave decline in wave A will be followed by wave B up and that is a better point of exit and also the 5 waves down confirms the larger view finally. For traders it is about watching what happens at levels. Failure to get past 11450 near term means wave 5 down to 10800 or lower is next.