Is the Stock Market Rally Over? What Do the Charts Indicate?

Nifty Enters Bear Trend? A Word of Caution for Long-Term Investors

Historic Rally

Taking a historical perspective, Nifty has been in an uptrend for the past 3.5 years. From the lows of the Covid pandemic at 7511.10 level, it delivered multibagger returns of nearly 170 per cent, reaching the recent all-time high at 20,222.45 level. Most stocks performed exceptionally well with multibagger returns. However, the important question now is whether we are still in an uptrend.

Signs of Distribution

A technical analysis of the current situation reveals that this rally can be divided into 13 waves, following a 5+4+4 impulse wave structure. The last 13^th wave began on August 31, 2023, at the level of 19,223.65 level and ended on September 15, 2023, at the level of 20,222.45. For the first time since the Covid lows, none of these waves breached the lows of their initial wave. However, the recent correction breached the lows of the 13^th wave (19,223.65) with strong volumes. This trading action broke the sequence of higher highs and higher lows for the first time in 3.5 years. Additionally, if we track the trading action from July 20, 2023, we find clear signs of distribution on the daily timeframe, with a breakdown of a trend reversal price pattern known as a Head and Shoulders pattern.

Hope for Long-Term Investors

The US market Index Dow Jones is already showing a lower top and lower bottom structure. If we track the FIIs index long position in Nifty, it's at levels below those seen during the Covid crisis, at 11 per cent on the last Thursday. So, the question arises: will FIIs really support the markets? In situations like this, they often engage in sectoral churning, so FIIs fan club might also need to be sector-specific.

What about Indian investors (DIIs, Retail Investors, and PROs)? The Indian Mutual Fund Industry has a size of around 40 lakh crores, and assuming a 50 per cent equity share (up to 20 lakh crores), if fund managers are sitting on 5 per cent cash, which is in line with industry standards, it amounts to 1 lakh crore in cash. By adding in Insurance companies, LIC, AIF, PMS, HNIs, and Retail investors, we have a historic liquidity of around 1.7 lakh crores. This suggests that any fall might not be as sharp as compared to the Covid-induced drop.

In conclusion, we can consider this a bear trend as long as Nifty trades below the last all-time high (20,222.45 level), and a decisive move above this high will invalidate this scenario and potentially mark the start of a new uptrend, which could be counted as the 15^th wave. Typically, this type of bear trend lasts for 8-20 months, so it's essential to plan long-term investments accordingly. However, please remember that this is an assumption, and it's important to follow the mentioned levels for your investment planning.