Updated: Jun 12
In our previous blog ( https://www.dvsafeacestrategies.com/post/market-outlook-strategy-sectors-hinting-at-accelerated-weakness-d-v-safe-ace-strategies ), we shared short term market outlook along with naming the sector that may be ready to take a hit and the strategy that investors must follow in tense market conditions.
This blog is aimed at making a few significant predictions on Indian equities considering a longer time frame.
Most of us must have surely heard of a very popular stock market theory named Elliot Wave. However, not many make use of it appropriately and often end up with just assumptions and no concrete conclusions to rely upon.
Skipping straight to the essentials, Elliott proposes that all price moves on the market are divided into:
five waves in the direction of the main trend (waves 1 to 5)
three corrective waves
Let us quickly proceed towards viewing the technical chart of Nifty50 to practically gain an idea about how this theory functions with our simplified analysis at D&V Safe Ace Strategies:
Nifty50: 1W (Weekly) Historical Technical Chart
As stated earlier, Elliot Wave comprises of 5 waves in the direction of main trend followed by three corrective waves. Here, the above historical technical chart indicates the functioning of Elliot Wave Theory and how an investor on Dalal Street would have made a fortune if an appropriate analysis was made at the right time.
Identification of Elliot Waves can be determined once formation of Wave 1 is complete on the charts. Post completion of Wave 1, formation of Wave 2 begins which brings a significant, healthy correction. Wave 2 is the period when medium - long term investors have to identify fundamentally sound companies for investments as most of them are available at very attractive valuations. In simpler words, this is the accumulation phase before the party begins. Wave 2 as per the theory usually ends when the index has rolled back by around 38.2% - 61.8% of Wave 1.
Once Wave 2 is completely formed, Wave 3 which is what the Elliot's followers live for begins. This wave is the one which gets the party started as it is the mightiest and the longest wave of rise where prices are accelerated and the volumes are increased. A typical Wave 3 exceeds Wave 1 by, at least, 1.618 times, or even more.
End of the mighty Wave 3 brings in beginning of the next corrective wave which is Wave 4. This wave is often difficult to identify, it usually rolls back to around 38.2% (maximum) of Wave 3. Once Wave 4 is completely formed, Wave 5 begins which is a wave that gets the bulls back to the driving seat.
End of Wave 5 brings the three corrective waves into action where a steep correction resulting in mass wealth erosion is witnessed. In the above historical chart example, the three corrective waves are nothing but the deadly 2008 recession.
Where are we presently according to this theory? What possible targets can Nifty50 achieve according to this theory?
Nifty50: 1W (Weekly) Technical Chart
Presently, formation of Wave 1 is complete on the weekly chart of Nifty50. The correction that the index is currently witnessing is an indication of formation of Wave 2 (accumulation phase). Usually, end of Wave 2 is witnessed when it has rolled back to somewhere in between 38.2% to 61.8% of Wave 1. We, as per our analysis at D&V Safe Ace Strategies believe that Wave 2 will end somewhere in between 14,367 - 15,555.
Post complete formation of Wave 2, a massive party at Dalal Street will begin as the index will witness a dream run leading to formation of Wave 3. This rally in the index will be no less than a golden opportunity for investors to make a lifetime of wealth with fundamentally sound companies over a period of time. We expect Nifty50 to hit 25,000 mark conservatively by the end of Wave 3. Aggressive target range for Nifty50 by the end of Wave 3 stands at 29,000 - 30,000.
Assuming that the index hit 29,000 as the peak of Wave 3, target of Wave 4 (corrective wave) bottom would stand at around 23,437 approximately. Once the formation of Wave 4 is complete, bulls will be back at driving seat and Nifty50 index would proceed to claim 35,000 mark by the end of Wave 5.
What strategy should one follow during the current correction phase?
Have SIPs in fundamentally sound companies during the current accumulation phase (Wave 2) to gain massive rewards during Wave 3.
Learn to freakout less and begin loving a market correction!
Why is SIP mode of investment attractive as compared to lumpsum investment?
--> Lighter on wallet
--> Enables rupee cost averaging
--> Makes market timing irrelevant
Where is my Sensex and Nifty50 at the end of Elliot Wave Theory's Wave 5?
Sensex: ₹ 1,16,900 approximately
Nifty50: ₹ 35,000 approximately
We might also release a set of few potential multibaggers in upcoming blogs for QTC Prime subscription holders. Link to browse QTC Prime Subscription details: ( https://www.dvsafeacestrategies.com/plans-pricing ). Happy Investing!
Disclaimer: We are not SEBI Registered. The above mentioned analysis is not a recommendation and is mentioned here for educational purposes only. Do consult your financial advisor before making any decision regarding your investments.