Sensex targets for 2008 : ET

Sensexbs targets for 2008

The current bull run on the Indian bourses has surprised even the most optimistic analysts and has made a mockery of all predicted targets. Although the market has seen substantial value-based corrections — the one after the NDA debacle in May ’04, the commodity-led correction in May-June ’06 and last year’s sub-prime related correction — it has consistently managed to shrug off these setbacks and bounce back to make newer highs.

It has also made a fool out of all those who have used these corrections to write a bull obituary. So, as the bull market enters its fifth year, we set out on the arduous task of finding out the possible targets for the Sensex in ’08. In the process, we stumbled upon a certain method of technical analysis based on Fibonacci ratios, which have seen considerable success in finding the annual targets of the Sensex in the past. To put the method in place, we considered the Sensex’s monthly charts in a calendar year.

We then subtracted the lowest monthly closing from the highest monthly closing, taking into account the Sensex levels at the end of each month. This difference gave us the range for that particular year. We then multiplied this range with the Fibonacci ratios of 0.382, 0.618, 1 and 1.618 to get various multiples. Then these multiples were added to the tops and subtracted from the bottoms of that particular year to give us the targets and supports for the next year. For example, the highest and lowest monthly closes for the Sensex in ’04 were 6602.69 in December and 4759.62 in May, giving us a range of 1843.07.

This value of 1843.07 multiplied to the Fibonacci ratio of 1.682 gives us 2982.08. And 2982.08 added to the highest monthly close of ’04, i.e. 6602.69 gives us 9584.77, which is strikingly close to the top we saw in ’05, i.e. 9442.98. LOOKING AHEAD As we can see from the table below, at least one among these Fibonacci ratios has given us a target that is in a range of +/- 5% of the final realised value of the Sensex.

Taking this calculation forward, the highest monthly close of the Sensex in ’07 was 20286.99 in December. Similarly, the lowest monthly closing value was 12938.09 in February, giving us a range of 7348.9. If we multiply this range to the various Fibonacci ratios like 0.382, 0.618,1 and 1.618, the corresponding multiples are 2807.28, 4541.62, 7348.9 and 11890.52 respectively. So, in order to find the Sensex targets for ’08, we added these multiples to the highest monthly closing of the Sensex in ’07, i.e. 20286.99.

So, the possible targets of the Sensex in the year ’08 at 0.382, 0.618, 1 and 1.618 Fibonacci ratios are 23094.27, 24828.61, 27635.89 and hold your breath, 32177.51, respectively. SHOW ME THE BRAKES However, as the market keeps heading northwards, the margin of safety keeps getting smaller for an investor. This further enhances the importance of an appropriate stop loss. In order to find that for the Sensex, we looked into various technical indicators, besides the ones based on the above-mentioned Fibonacci ratios.

The stop-loss level for the Sensex will vary from trader to trader based on his/her trading horizon. For a very short-term trader, the stop loss will be the rising trend line joining the bottoms made on October 22, November 22 and December 19. This value is roughly around the 19400 mark at close on December 31.

On the other hand, a long-term investor can use the simple 200-day moving average (DMA) as a stop-loss level, which at close on December 31, was at 15995. Just how important this 200 DMA is for the overall continuation of the bull market can be gauged from the fact that after languishing below the 200 DMA for a long time, the Sensex moved above it in May-June ’03, signalling the beginning of the bull market. In the subsequent years, this 200 DMA has provided the market stunning support and has been broken only twice — during the NDA debacle in May ’04 and the commodity-led crash of May ’06.

However, on both these occasions, the market has managed to bounce back above it to signal the continuation of the bull market. Moreover, the Sensex has got support and bounced back from the 200 DMA on many other occasions, including during the recent subprime-related crash. So, a decisive close below it, in all probabilities, will signal the end of the bull market.

However, for a more optimistic investor, the final level to watch out for is the lowest monthly close in ’07 — 12938.09 in February. A close below this will mean that the Sensex will have made a lower low for the first time since the beginning of the current bull run, signalling its end. Another point to consider is that post the April ’92 peak of around 4500, the Sensex spent 11 long and painful years in a consolidation mode with several bottoms around the 3000 mark.

Although it tried to break out of this range and even managed to make a new high in late 1999, early ’00, this break-out proved out to be a false one and it once again slid to make three more bottoms around the 3000 mark. The real break-out came in June ’03 when the Sensex said a final good bye to the 3000 mark and set out for the sky. A break-out from an 11-12 year consolidation is generally seen as a very powerful break-out and the ensuing uptrend can last for many years, if not decades. Moreover, the fact that the Sensex has continuously made higher tops and higher bottoms suggests that the bull run is strongly in place.


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