Outlook for 2008

It is that time of the year when we take a look at the twists and turns that lie ahead for the Sensex. When we did this exercise last year, our preferred view was that the Sensex would move sideways between 11,000 and 15,400 in 2007. Our outer limit for 2007 was 19,550, but we had added that ‘speculative excesses’ would accompany a move to these higher levels. The Sensex has moved beyond the upper limit.

The move past 15,400 proved beyond doubt that the long-term uptrend has resumed from the June-2006 trough of 8,800. But this move appears to be the final (fifth) part of the long-term move that commenced in May 2003. This final leg can take a few more months to complete during which the Sensex will move between 17,500 and 24,800. We place the outer target for the Sensex in 2008 at 27,145.
Fifth wave

To understand what can happen after the completion of the fifth wave from the May-2003 trough, we need to step back and take a longer term view, from 1980. It is then evident that this long-term bull market began way back, in 1988. Following a protracted correction between 1994 and 2003, a fresh up-move commenced in May 2003. The swiftness and the gradient of the move from May 2003 have all the characteristics of a third wave.
Third and fourth wave

Once the third wave from 1990 completes, our market could launch into a corrective fourth wave. Whether it will be another swift and sharp correction akin to May 2006 or if it will be a long-drawn one on the lines of the correction from 1994 peak remains a conjecture at this point. This correction can make the index test 15,200 or 13,700. But the long-term outlook (next 10 years) for the Sensex remains positive as the index will resume its upward trajectory after the completion of this long-term correction.

To put it simply, the first few months of 2008 could be fairly benign with the Sensex moving within the 17,500-24,800 band. But the index can form a significant peak anywhere between 20,000 and 25,000 and a long-term correction can then ensue. The initial support in the event of a major correction is 16,000. If this is breached, 15,200 would be on the cards.

We will revisit these forecasts if the upper (24,800) or the lower limit (15,200) for the year is breached by a significant margin.

Via BL