New Lows in the Nifty: What Next ?

The NSE50, India’s benchmark stock market index hit a new 10 month low by closing at 4150, down from the lofty highs of 6350 recorded in January 2008, just five months ago.
The Market is in a bear grip, with lower highs & lower lows recorded at periodic intervals.
“I told you so”
Sorry about this, but the current leg of the down move started when the Nifty moved below 4950, a minor low. This down move was highlighted in my newsletters (http://www.technicaltrends.com/) and on CNBC India, many times. Since this down move started, I have consistently maintained that we remain in a bear market. The reasons are based on simple technical analysis. The Nifty continues to follow a pattern of lower highs, lower lows. So far this continues, the intermediate down trend remains intact.
New lows are bearish. Following this principle, every move by the Nifty to lower levels causes a ripple effect by which further declines are initiated.
How will this process of lower levels, end ? After all, even bear markets will come to a termination, some time or the other. After a 35% decline, the Index will eventually have to start a process of ‘base building’ or consolidation at the final lows. This process could take months. In this period the Nifty will try to test the final lows recorded and will eventually have a successful test of the lows – meaning that the Index will remain above the last recorded lows and withstand selling pressure. This is how the next bull market will start.
As I write this today, the index is making new lows therefore the process of base building has not even started. While the decline continues, it is not possible to call the end of the bear market. The Nifty could stop right here, or go down to 3600 or in a worst case scenario, go down to correct all the way to 2600. It is not possible to forecast the point at which this decline will end. My own guess is: the broad support zone between 3600 to 4200 will probably be the point at which the bear market ends. It could be 3600 since we have already broken down below 4200.
All of this is just guess work.
Yet, fortune favors the brave. With every new decline in the Nifty, the market comes closer to its eventual lows. Some buying in strong sectors may well be done, if you have spare money. With the disclosure that I am myself buying these sectors: fertilisers (Nag fert, Chambal) and Natural Resources (Neyvelli, Cairn) are currently under focus.

Denial: If I refuse to see it, it does not exist

Financial Analysts will often go into a state of denial: If I refuse to see it, then it does not exist. This happened in the USA when the start of the sub prime crisis was promptly followed by cries of “nothing to worry”. All the leading perpetrators of the crisis intially claimed that things were just fine. Later, we realized how little these people knew about their own businesses. But, ignorance came later. Denial came first.
In India, we are confronted with a simiar story of denial by the leading financial analysts who come on CNBC.
The Nifty has been in a bear market since Janaury 2008. This fact is apparent with the Index falling from 6350 to 4150 (today). Nothing to worry, say our ‘fundamental’ friends – economy is good, earnings are robust, the fundamentals are strong, growth propects are wonderful…… Now, this is denial. The stock market has fallen by 35% and threatens to fall more, but the analyst insists that things have never been better. Sure. The nice thing about India is that we are a free country. Freedom of speech is guaranteed by the constitution. So you can pretty much say what you want. But listeners should take all of this talk with more than the customary pinch of salt. Since most fundamental analysts are fund managers or portfolio managers of some kind or the other, there is a conflict of interest involved. Remember, these people get paid when they receive funds from the public. You do not get money when you say that we are in a bear market. Therefore, when all other explainations fail, you start saying, the long term picture is excellent. Translation: give me your money otherwise I will lose my two crore (twenty million) rupee per annum job. I call it denial.