There are times when investor behaviour, market data-points and technical charts scream a sell at you. One instance was when we wrote the ‘Index outlook for 2018’, published on January 6, 2018. We had said that a correction was imminent and that mid and small-caps will bear the brunt of the fall.

Stocks moved in line with our expectations in 2018. As we step into 2019, the problem is that the front-line indices are not reflecting the true state of affairs in the market. A Business Line analysis showed that 85 per cent of the 2,413 stocks actively traded on the BSE recorded losses in 2018 and 1,500 of these lost over 25 per cent. But the Nifty is up 3 per cent, while the Sensex gained 6 per cent in 2018. The broader Nifty 500 index is down a meagre 3 per cent.

The movement of Indian benchmarks also diverges from the trend in other major global indices, making the Sensex and the Nifty among the best-performing global indices this year. It’s obvious that the concentration of institutional demand in the top 500 stocks in India is tampering with the natural movement of the indices.

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Will this state of affairs — where the Nifty and the Sensex continue to show resilience despite turbulence in overseas markets, tightening liquidity and impending general election – continue? We will get an answer only after seeing the action in the first half of 2019. The index outlook for 2019, therefore, outlines two scenarios, one where the resilience continues and, two, where the global stock market decline pulls down Indian benchmarks as well.

Long-term outlook

As explained in the earlier annual outlooks, we are assuming a fresh long-term up-move from the low formed at 2,539 in March 2009 in the Nifty and from 8,047 in the Sensex. This is to align ourselves with other global indices that retreated below the 2001-lows, following the 2008 crisis.

The severity of the recent correction in the major global benchmarks such as the S&P 500, the Nasdaq, the DAX and the Nikkei, that declined 20-30 per cent from their 2018-peaks indicates that a long-term correction is currently in progress in the global markets. This decline could be correcting the entire up-move from the 2009-low. While a short-term pullback is currently in progress, the decline could extend to 2019 as well.

The Nifty too reversed lower from the September peak of 11,752, but the Indian benchmark escaped unscathed from the December-2018 correction in global markets. This arrested the annual loss for the index. There are two scenarios that the index movement can follow in 2019,

Scenario 1: This is the positive scenario that assumes that the Nifty will continue to display resilience and remain relatively stable, compared to global peers.

According to wave counts, this scenario assumes that the third wave from the 2009 low, that began from 5,118 (30/08/13), is still in motion. The ongoing correction can be taken as the fourth wave of this impulse wave. There can be prolonged sideways move for the greater part of 2019 as the fourth wave and the fifth wave complete. The down-side can be limited to the 9,500-10,000 zone, in this case.

Scenario 2: This is the more bearish scenario that assumes that the Indian markets will align themselves with global markets and undergo a severe cut in 2019.

This will come into play, if we assume that a 5-wave formation from the low of 2,591 was completed at the 11,752 peak in the Nifty and 38,934 in the Sensex. The floor moves much lower here — up to 8,200 in Nifty and 27,200 in the Sensex. The extent of the ongoing bounce-back and the ability to clear the recent peaks will help determine the right count.

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The year ahead

The year 2019 will definitely be volatile. But as explained above, whether indices will whipsaw in a sideways range at the higher level or sink into a deep correction is not yet clear.

The area around 11,150 is a significant hurdle for the Nifty (Sensex –36,800). If the indices fail to move beyond this level, it will imply that the second scenario can unfold. Nifty can decline to 9,400 or even 8,200 in that scenario. Sensex targets are 31,250 or even 27,200.

We can look at subsequent targets in our mid-year review, if things deteriorate significantly.

Conversely, if the indices manage to move above the hurdles mentioned, the first scenario is more likely. The Nifty can then attempt to test the peak of 11,750. While the range-bound move between 10,000 and 12,000 is more likely, it can attempt to move up to 12,500 or so. Upper targets for the Sensex are 38,930 and 41,500.

To sum up, the volatility that began in 2018 is likely to continue in the coming year. The most likely movement for the indices is sideways with a bearish bias. The positive is that the widespread correction in smaller stocks is already throwing up investment opportunities.

Investors with a long-term perspective can watch out for value propositions as stocks correct further.

This analysis is based on Elliott wave principles and seeks to provide guide-posts that help in making investment and trading decisions over the year. Under E-wave theory, we work with many counts simultaneously. Two of the most likely counts are presented here.

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