The last Hurrah !
15 Sep 2020 ● 05:23 PM
15 Sept 2020
The last Hurrah !
The 5th wave is what should be the last hurrah, but we can end up calling every broad based rally the last hurrah and try to get away with it. The markets may not always respond in kind. The last move should not only be the blow off move in a rally it also at times involves negative divergences in some of the data associated with the market concerned. Alternately you will get some of the most extreme readings associated in the past with such important tops, in terms of Long positions, sentiment, Put/Call ratio, Nifty Premiums etc.
Right now many of those things are missing. The only time markets top on weaker reading s are right inside a bear market. But in the last 2 reports I have used multiple reasons to discard this notion. In August I simply listed it out. My entire list of expectations from the dollar trade and its impact on various assets and why. Unless any of that changes stick with the notion that we are in the early stages of a bull market for the next few years.
This bull market may also be called a bubble. But did you ever hear of a bubble that ended in 6 months?
What stage of the Tech bull market would you call a bubble? The entire move from 1980 or from 1990? or the final 2 years from 1998? The bubble era is often the one we refer to when broad based public participation comes in. That gets further accentuated by narratives and ill-conceived notions feeding up on themselves. Like during the Harshad Mehta bubble we started to value sick companies that could be turned around by his magic hand. That suddenly led to a search of the next sick company. Sick is akin to insolvent. Then they were referred to the BIFR, and now the Insolvency code for restructuring. This self-reinforcing move then leads to over valuation of mammoth degree. Like during the tech bubble anything with a Dot Com in front of it would go to the moon even without any earnings. For good companies like Infosys it meant a PE ratio of 150.
What I am getting at is that bubbles start and end only after they go way out of hand. People are calling the first rush of blood from retail investors a bubble now days. I think this is only the value buying phase. If this is the start of a bubble it may go on for up to 2-3 years and things will go far out of whack than they ever have in the recent past, meaning going back to the 2000 era like madness.
Be prepared – we will measure and map it will Elliott Waves. Here is my Map as it stands today'
Where are we today? We are within the first wave of this massive wave. Wave 1 of a bull market [or bubble], that will end with the first five wave advance from the March 2020 bottom. Each wave must itself sub divide into 5 waves and thus Nifty is now about to start wave 5 of 1 of the bull market. Maybe it just did at 11185. The recent decline was mostly wave 4 from the 7511 bottom as shown below.
The chart above shows wave 5 for Nifty may have two possible fractal calculations. A truncated 5th wave is known to be 38.2% of wave 1-3 [the entire advance from 7511] and that would give us a price projection of 12980, very close to the top end of the rising channel drawn from the wave 2 low. This is the most probable outcome. Now it is also possible that wave 5=1, since the 3rd wave extended. Wave 3 was 138.2% of wave 1 a small extention. If 5=1=14600 then it will be a massive advance. As of now 12900 may sound more believable. To some not even that. Wave 5 can be short and maybe considered complete if we can count 5 waves inside it. Time wise wave 1 took 6 weeks so another 5 weeks from here puts us into late October. So 5 weeks and 12900 are the variables to track over the next month.
The 5th wave is now apparent in so many places like the Reliance Industries stock chart that broke out of a wave 4 triangle.
The IT sector too started wave 5 and [maybe even the Metals index is due to do so]. The IT sector has become the best performing near term and will continue to hold that position.
Precious metals and metals stocks are starting wave 5 up.
The Euro is starting wave 5 up. The list goes on. But the Euro is particularly interesting and of great importance because it is the opposite of the dollar. Unlike what has become popular perception to call for the end of the Euro, the Euro is in wave 3 of its long term bull market that started in 2017. Wave 3 is subdividing and we are starting wave V of 3 now. This wave will break past the falling trendline from the 2008 high to set the stage for this long term reversal to go back toward the 1.6038 high seen back then. For now the next big target is the 2014 high of 1.40. Waves 3, 4 and 5 are all pending on the upside.
One question I am already getting a lot of is, what happens after wave 5? How far a correction will we get. The answer to that question is not easy. First we do not know the actual size of wave 5. If it is truncated or within 13000 a pullback in wave 2 to test the 11185 we made recently again is not ruled out. But what I think most people want to hear is ‘Crash’ back to 9000. I am not sure that happens. In fact it would be prudent to be prepared for the exact opposite. What if this 5 wave rally becomes a 9 wave experience? This happens if wave 3 is extended into a 5 wave move itself. Then we get 5+4 = 9 waves to complete an impulse. So we cannot presume anything. After 5 waves we will look for a 3 wave correction first and the patterns that develop will tell us how much downside to prepare for as it unfolds.
Wave 2 down at larger degree will only set us up for waves 3, 4 and 5 later. The entire bull-run over 3-4 years will eventually end in a long term 5th wave completing. The long term chart below shows the parallel channel of the 2-4 lows projection the upper end of the channel near 20000. These numbers sound crazy today but may become realistic once a sufficient level of global inflation in prices is priced in.
Now you have a picture of what to expect in Nifty, another 1000 points up to start with over the next month then we will watch out for a possible end to the 5 wave advance and try to anticipate a correction. We will either get it or end up in further extensions of this move in a continued rally with small corrections. The picture is not clear on that front and depends a lot on how the dollar reflation plays out. Will the dollar index complete a wave 1 of the bear market and bounce for a larger retracement or not?
What fits with my wave 5 up immediately is the set up in the S&P 500 index where wave 1 of 3 was smaller than wave 1 causing an extension to happen. Other US indices however can count as 5 waves done. Top end of the channel is at 3680 for the next move up to achieve.
Europe, Brazil, Australia, and China also show characteristics of wave 4 completing as a consolidation and wave 5 up can start. Need a little more confirmation that it has started. The chart of the DAX below shows a clear running triangle in wave 4 in formation that touched the lower line in wave e of 4 and so we are just waiting for wave 5 to take off. The top end of the channel goes to 15900 for wave 5 up to achieve.
Gold, Silver, Copper are also in wave 5 of a rally.
Many asset classes therefore have aligned for wave 5 up. Only south east Asia has a different wave count. Wave 2 down is forming in Malaysia, Jakarta, Taiwan etc. However these markets may now be ending 2nd wave corrections. The KLSE composite below bottomed near the wave 4 low of the previous advance, a good place for an important bottom and if it takes off from here a larger degree wave 3 to new highs is coming next.
The next question is how to play wave 5. The simple answer is to look for stocks and sectors that are going up in wave 5. To come up with stocks and sectors look at the relative strength of stocks over a certain time period. In this case I have used the 60 day RS and listed the top 30 F&O stocks below. An RS means the stock divided by the Nifty as a ratio of performance. Presume Those that have performed will continue to do so is a simple paradigm. Performance chasing is how you stick with the best performers in a bullish trend. Do not chase the next best. So the list below is of the stocks that rank on the top of the F&O pack of 137 stocks on a 60 day RS Comparative. Within this list of 30, watch out for those that belong to a particular sector. If there are 3 or more stocks of a particular sector that that is the sector that will hold out. The top 15 stocks has metals tech and autos so keep chasing the same sectors again. This list gives you the focus then just look at the charts of each and discard a few that you do not like. Then you have a final list of where you want to concentrate.
|JINDAL STEEL & POWER||1.4488|
|TATA CONSUMER PRODUCTS||1.4368|
|MAX FINANCIAL SERVICES||1.2594|
|INFO EDGE (I)||1.2412|
|MAHINDRA & MAHINDRA||1.2376|
More recently Late Friday evening SEBI released a circular asking for Mutual Funds in the Multi Cap space to expand their holdings of Mid and Small cap stocks. Different estimates of how much money will flow into this space are out. 20-30k crore is the range. Ominous that just 2 years ago after Midcaps topped out SEBI put restrictions on holdings of Midcaps and put out a list that had to be adhered to. Now they are forcing ownership. The first time they accentuated the bear market in Midcaps. That went on for 2 and a half years. Now this current move will accelerate the new bull market in Midcaps that started with value buying. Midcap/Smallcap stocks will again outperform over the next year or two.
The chart shows the Small cap index because it has broken out of the falling trendline from the 2018 top. The Midcap index is sitting just below the same trendline and waiting to breakout in the next rally. The P/E on the chart is approximate as different indices carry a different number from different sources. The current number is skewed upwards as well due to poor numbers after the pandemic. But on Elliott waves 2 and a 1/2 year bear markets have been common and as we break out upwards a new bull run has started in the segment.
The RS chart of the Midcap index also tells the same story we hit the bottom end of the range and are now emerging from there. What stops the RS to go back to the top end of the parallel channel? Nothing I suppose except liquidity that is now going to be abundant.
The Stage is SET
I have outlined what I see coming right up. Today as I write the daily momentum indicator for Nifty gave a buy signal along with Nifty being above the 20dma. A set up I think carries high probability of playing out. Conclusion is that wave 5 has started and will be driven by a broad based rally including midcaps, small caps, auto, metals, technology, and pharma sectors leading the way. Between wave 3 and 4 you witnessed a lot of rotation and volumes. This was the warming up phase we discussed last month. It is also the shakeout that wave 4 does. Weak hands give up and leave the herd. Wave 5 then carries on without them and therefore appears to have lower volumes. Despite the low volumes the 5th wave will be steady on the way up as fewer sellers now allow prices to fly. They will fly till the FOMO crowd comes in and generates that last ditch spike in volumes at the end of a broad based rally. That spike should mark the end of the 5th wave, Wave 5 may carry to 13,000 Nifty and once it ends an A-B-C pullback to 11200 again would be a normal affair over the next few months afterward. I have discussed other alternates right at the start of the report as well just in case we do not follow this path exactly. But this is the preferred outcome Elliott Wave wise.
What wave 4 has done shows up in some indicators as well. The Put call ratio below was diverging negatively for a while and now has ended up falling to the lower end of the range more associated with market bottoms. This is ideal for wave 4 to end and creates lots of space for wave 5 to occur.
The next indicator is for the Crash Team guys. The volume put call ratio ends up at the lower end of the range near the red horizontal lines before any major top that holds for 3-6 months. At times there are negative divergences as well before prices roll over. Right not the Vol PCR is only breaking down from the previous up trend and is halfway down the range. So there is no hurry to stand on top of that mountain and scream yet.
Similarly if we look at the Total market Futures Open Interest [stocks+indices] we get this chart. The highs and lows now fit a nice channel just like the spot price. Isn't that interesting how patterned even sentiment is. So why shouldn't we end up at the top end of th channel before wave 5 long term is over by 2023-2024, or earlier whichever comes first. The upper channel could be near 300000 crore in value terms from 126000 approx today. At the wave 3 high we were close to 200000 crore so it is not out of the world expectation in a bull market [or bubble].
The next two charts explain what I said about the behavior of wave 4 and 5 using the breadth as represented in the Advance/Decline ratio. Here I use a 40 day average of the A/D data. In my experience breadth often drops in wave 4 as seen during the previous bull market [2002-2008]. Just before the final surge into each high within that bull market I have drawn vertical lines and a triangle to show the location where the A/D ratio dropped and then surged one last time into the near term top.
Now this is where we are on the ratio, it has dropped during wave 4 and should logically surge one final time into wave 5.
FII sentiment as displayed in their options positions shows a slow and steady decline in Long positions towards a net short at levels consistent with previous bottoms. Sure data can decline but it is near the lower end and not top end where one becomes concerned.
FII net position in index futures tells the bigger picture. They were outright bullish to the highest degree in 2016 in the months before Demonetisation. From there they went through the great unwind into the bear market of 2018-2020. Briefly the yellow range shows a period where they were neutral +/- the zero line and then went short. In March of 2020 by the second week they were record short [by record I mean highest since data became available from NSE]. From there positions have recovered to the neutral zone again and been hovering there for the last few months even as markets rose. I am keenly watching if FII sentiment changes to the point where significant long positions are built up again. This neutral range needs to breakout one side. If the previous bear market is truly over then we should break out of it on the upside.
Last on the list of sentiment Indicators is the Nifty discount/premium in the futures market. During bullish periods readings can average above 30 before a top. This year the persistent discount therefore was an indicator of excessive bearish sentiment. As we went past the 78.6% retracement mark at 11400 this deep discount finally came into a premium. but in the last few days we see a mild discount again. All in all the average is now in rising trend. But not near where previous tops occurred so the trend from extreme bearish sentiment to somewhat bullish where people start buying nifty futures again is slowly building up. Nifty is trying to get back above the breakdown point, where it broke down in March from a 2 year ending diagonal pattern. This is an important event.
In fact here is an important observation that I should have discussed right at the start but I got carried away in the discussion on the immediate trend. The month of August ended with the NIfty finally overcoming the 20 month average, by closing above it but to top it up the monthly momentum also crossed over to the buy side as seen here. This is the exact opposite of what happened in Feb 2020, at the end of the month. That month Nifty closed below this average and the momentum confirmed a sell signal on the monthly chart. That prompted me to write the March 2020 Long short report stating that the bear market was now confirmed and we were going to at least 8500 in this move. Now if the exact opposite has happened on 31st of August, what should I say? I think this confirms a multi month trend reversal if nothing else and it cannot end this soon.
A full cycle to the upside should follow before it reverses on the monthly chart. I can hear some of you saying 'Failure' but let's not preempt that till some level breaks on some lower time frame. Right now we are not even breaking the 40day ema. A full cycle as has happened before involved the momentum going up to the grey horizontal line or higher after most previous buy signals.
The Macro factors
Up front let's start with the dollar. But I have already made my point about the dollar being in a bear market till 2024. Does this reflect on Emerging market currencies is the right question. The long term chart of the MSCI EM Currency index shows a 5 wave advance and a 3 wave pullback and now a new wave up starting. This should logically be another 5 wave advance.
The near term shows wave 3 of the rally in EM currencies progressing slowly with higher highs and lows. No sign of fatigue here.
The secondary impact of a falling dollar is that of driving up prices of commodities. EWI published this interesting chart this month in its latest Asia Pacific Financial Forecast. I have put out something similar using other data sets as mine was not backdated to 1960 but this confirms it. In The Bloomberg Commodity index, here after wave 5 an A-B-C bear market has ended right into the wave 4 zone of the previous bull trend. This strongly raises the odds of starting a new bull phase for the commodities.
This then fits with my other judgments like that on Copper. The entire pattern from 2008-2020 is a triangle. A 4th wave consolidation because triangles are common in 4th waves. Wave E of the triangle broke the lower line but not the wave C low and so the pattern is intact. Wave 5 up is developing and commodities wave 5 can be exponential. Still all I have said so far is we go past the wave 3 high of 4.55. But if I draw a parallel channel it opens up long term upside to even 12$. Now 12$ copper would appear impossible today but let's stay the course and see how far we can get. Between now and 4.55 we will know a lot more about the fundamental nature of this move. Copper prices closed August outside the triangles upper line at above 3$ and that is a breakout from the triangle. Staying above 3$ we are in a confirmed 5th wave now.
Based on the dollar thesis I changed the wave counts for USDINR to mark the 5th wave as an ending diagonal. At the end of August the monthly momentum for USDINR crossed over to the sell side again. The lower end of the wedge is at 72.50 and once broken it opens up the space down to 68 near the wave D low. In this chart 5=1 was achieved. and 3=161.8% of 1.
The positive impact of USDINR going up on gold in INR terms is then over for now. It is completely dependent on the dollar price of gold going up. Even then the long term chart of the gold price has price channels that stretch up to the 100000 mark, and 5=1 is as high as 133000.
In the near term Gold from the 2018 bottom started an impulse wave that has to complete 5 waves. We are now in V of 3, and that will be followed by a wave 4 correction and then a 5th wave that will also go from I to V. So many legs to complete and we could be well over 2800$ by then.
Silver MCX prices went past the wave 1 high on this chart briefly and that confirms wave 3 is on course. Eventually we could go to the top end of the parallel channel near 180000 in wave 3.
On the comex the silver bear market ended only in 2020. Gold and silver do rise and fall together but by different magnitudes. But inter market divergences like the one in March of 2020 are long term confirmations of a lasting bottom being put in place. So the next move in comex silver will be wave 5 of this move to 35-38 while gold ends wave V of 3. And during wave 4 down, silver will be in wave 2 down at one higher degree. These variations may go on for a while. Silver has a lot to catch up with gold and will outperform it longer term in price performance as always.
All of the above tells you one thing. The dollar bear market has triggered a bull run in commodities prices. And the high beta proxy, for rising commodities prices, is mining stocks. This is the easiest thing to bet on before anything else because we know the drill. The bull market in gold and silver mining stocks and in metals producers has started across the board. The Nifty metals index similar to Copper shows a triangle pattern between 2008-2020. We are now attempting to break the trendline for the wave E decline inside the triangle. Once we cross that blue line we should go right to the top end of the range. Eventually it should be off to new all time highs for the index.
For precious metals miners Fund of Funds like the DSP World gold fund or the Kotak gold fund are proxies. They invest in US gold and silver mining stocks. You also have the option today of using the LRS scheme to buy the stocks yourself with an international broker. Some of the top names are Barrick Gold, Pan American Silver, Franco Nevada. You can track the gold miners with the symbol HUI on investing.com, it represents the Gold bugs index. GDX and GDXJ are ETFs for the same.
Nifty has started wave 5 of 1 of a new bull market or Bubble phase that is just starting. The last Hurrah refers to wave 5 of 1 and not 5 of 5 that may end up taking us to as far as 13000 in the coming month or two. The best performing sectors will be those that were the best performing till now anyway for the last few months namely technology automobile pharma and metals. The falling dollar has started off a bullish trend in emerging market currencies and should follow in stocks that should eventually out perform the US as is the case during dollar bear markets. The commodity bear market and its deflationary effects are over and now we are witnessing the early stages of a new commodities bull market and mining stocks should be the best way to play this theme as they are now in early stages of a bull market. Sentiment indicators do not show any reason for concern on the health of the market as of now. Remain counter intuitive in your thinking about the market and make the most of this opportunity that few can still sight using Elliott Wave insights. Let's make the most of the last Hurrah into the Anti-Pandemic rally.