StageInvesting +Elliot Waves

Equity -Inflation Hedge?

We have learnt at several places that one should buy equities as an inflation hedge !
But why it is not working this time ?

It seems to be we’re in a risk- off trade globally as of now .

The key reason is US Fed.

FED is fighting inflation not only by using interest rates but alsoby bringing the equity prices down .

Equity market is also being felt responsible for inflation in USA

One example is housing bubble in USA. The employees of the US tech companies and start-ups have seen their ESOPs going multifold and they were buying houses at any price ,not only for living but addtional houses as well as an investment as prices kept going up due to butterfly effect.This has put pressure on demad-supply gap and housing is becoming unaffordable for middle and lower strata of the society.

Lower prices of equity might have direct impact in controlling inflation at least in housing bubble.

Fed Support

Fed is trying to fight the inflation by raising interest rates as well as it wants people to support its bonds -market in wake of tussles with Russia and Chiana . And it is working as we can see in rising bond prices.

Last time when US Fed did not support the equity ,happened in 1929 - when FED never intervened in the falling markets.

But after that for last 70-80 years , Fed always intervened to support the market so people started taking it guaranteed.

There is still hope that FED may support it as lot pensioners invest in equity in USA - but current focus is on inflation- control as US have certain interim elections .

Keep in mind that we are a tiny player ( a fly ) in a global markets - and when a tide comes - a fly has to nowhere to go but to just go with the winds. Controlling inflation is the key driver for US regulators and we all are feeling the heat.
There are several other factors behind why equities as hedge are not working :

a) Inflated markets due to last 2 years bull run
b) RBI is also increasing interest rate to fight currency depereciation ( as they no longer have enough reserves to intervene the currency markets)
c) Worries about presssure on companies margin due to increasing raw-material prices.
d) Fear about decreasing demand due to increasing inflation and lingering COVID impact on lower income classes

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Why There Won’t Be A V- Shape Recovery This Time

Recovery after the falls of COVID, Demonetization and Kargill wars were V shaped - but don’t expect the same this time .

Those were black swan events - not discounted by the market in advance - very sudden events .So market recovered very fast as soon as it realized the extent of damage by those events .

But this time - the fall is not out of sudden events - every future news is being discounted now - fall has been slow ( Oct onwards ) - so recovery would also be slow .
We can see a clear distribution pattern from October itself as well as FIIs were selling for last full year .
(In hindsight, that was a clear sign for this ongoing fall as currencies were falling all around the globe but India and few other countries were holding . But FIIs understood that and they cound see that we can no longer save our currency in wake of going against the global trend. They sold Indian and other emerging markets equities even before the real currency-depreciation started)

Bear -markets generally happen to be of 12-18 months duration in India - 6 months already gone - let’s hope we recover in 1st half of next year ( unless US crashes very badly ) And yes, let’s also keep a watch on our currency, more it falls ,more bad it would be for equities.

These all views are just opinions - forecasting is not so easy.

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is this a watch list to enter stage 2

This is trying to make a base in Stage 1.

And that is a healthly sign as stocks that make a base to move further they happen to give good upmoves as weak hands either get frustrated during base formation due to time or price fluctuations.

A clear S2 stage yet to start.

But keep in mind , sometime S 1 ase can also result in breakdown if the overall market crashes.

Hello Sirji, thanks for this details it helps. I also think that this time or in near term (2-3 months) Fed will not intervene to boost (liquidity) the equity mkt. Which also reflect on the charts too… that one or two more legs are pending and which will drag down the SPX to 100MEMA (3K around) and nasdaq to 9K approx resp. It will be invalid if Fed intervene in between.
In market we heard always history repeats on chart and then later on the ground likewise found that the chart pattern getting print this time is same as it was there in 2008 crash and that time also as of my knowledge Fed entered bit late and then recovery starts(i was not active in mkt in 2008). Not sure this time also the history might repeats. If so then again kind of recession is on the way, as you rightly mentioned in the other factors in your comment. Which may be the reasons.
In all this in 2008 also gold was out performed well for next 18-24 months and this time also gold has BO and retest is in WIP, so pls shed some light on this with your experience. TIA

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Elliot wave theory is a very very old theory (decades old?). And practitioners of the theory have not covered themselves in glory. I had read about Robert Prechter’s doomsday predictions few years ago and that was exactly from where markets turned. So for a person like me its difficult to bellieve in the theory blindly. I have followed a lot of guys and once subscribed to a guy who advised based on EW and found most of them to be wanting.

So although I prefer to take the help of technicals, I prefer to follow stuff which I have seen work more often than not and whose methods I find easy to apply in real time markets.

I used to read a lot of Vivek Patil’s write ups back when he used to write in icicidirect, but he was writing too many complicated things and always had an alternative scenario lined up. I myself tried to read, learn and practice EW but did not find it too easy to use. Maybe the fault is with me. But personally speaking, I find using the techno funda approach works the best.

If at all EW is to be useful, it has to be able to predict important turning points closer to top rather than predict doomsday scenarios when markets are already in teh doldrums. And these days with the spread of information being very quick and responses to them even quicker, I find that the cycles have turned very short and markets tend to go up and down very quickly.

I have nothing against EW, and often admire guys who simplify and put it up for others, (like you do), but prefer to take the this stuff with a pinch of salt.

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Gloom and Dooms Days -Are They Coming

Well today, we looked at the monthly charts of Nifty 50 – to get a long term picture.

Picture looks scary .

As per the Elliot theory, we have completed Wave 1 (after Triple Top) and now we are in Wave 2.

For full article, click on the following link.

Gloom And Doom Days Ahead ?

Counter question: If every likely future news/event is already being discounted now then does that not mean that we are nearing the bottom (unless more negative surprises are on the horizon that we are not aware of at this stage)?

While their is fear, but tons of liquidity is still sloshing around and will likely be around for some time.

P.S: Really appreciate you putting out your analysis in easy to understand format for everyone. Keep up the great work!!

I won’t agree that all future news/event have been discounted.

There’s still hope. People are still buying the dips.

Young kids are stil running their training programs on breakouts/pullbacks trading. SIP inflows are still near all time high levels.Till the time people are hopeful, market has a lot of scope to go down.

Tops are made on the peak of the good news and bottoms are made on the peak of the bad news. Don’t think that we have too much bad news around.

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You mentioned that wave 1 is done and we are in wave 2. Can you explain? Have we finished wave 1 down or up?

Sir here is the marking for wave 1 (counting from Covid lows)

Sir - If I was a newbie I would tend to agree with yours views but somehow I have a diffrent approach and different experience as far as EW theory is concerned.

Pros /Cons - Elliot Waves /Technical based Investing

But yes,= like every other approach, EW apporach also has its own challenges. Same challenges like value investing, growth investing or fundamental investing- nothing succeeds 100 % . One needs to have checks and balances at every stage (no holy grail)

Why I moved to EW ? What are pros and cons of EW from my prespective :

Before I get into pros and cons of EW, would like to say that any kind of chart -readig is like being an astrologer - how experieced you are , what is your background and where you live would make a lot of difference to your forecast ( a village astrologer , most of the times would be unable to get the prespective of city-dweller’s kudali on severals aspects)

Pros

(i) I was also a so called pure fundamental investor ( i still am) but many a times I could not enter or exit at the right time .
Many examples ( between 2015-2017) - entered Avanti Feeds, South Indian Bank, Bandhan Bank,HDFC AMC (late when half of the rally was done) at wrong time and could not exit at the right time - so loss of opportunity cost as well unable-to-book profits led me to find a method. Now EW helps me there.

ii) Apart from EW ,there is no long term forecasting tool .

Most of other technical methods are for postional/swing trades - for 5-20% gains. But for a long term investor ,they just add to the noise.EW can help in forecasting a target (up or down ) for longer term .

So if one keeps a track on key parameters ,one can ride or exit at the right time. ( all said, it can fail 20-30% of the times and even with EW ,no one can exit at the top or enter at the bottom . But even in fundamental investing that can happen.

iii) Stock market is made of humans. Human psychology plays a major role in moving any asset price.

EW works on the basis of mass psycholgy - fear ,doubt,greed, euphoria - waves 1,2,3,4,5 represent all of these . And you would agree, that stock prices are driven by human emotions and liquidity whereas fundamentals act as foundation (many a times, wven fundamentals are not required, one only needs hope-stories) . So EW is a good tool to help you identify state of those emotions.

Cons

i) EW throws various options at any point of time so one needs to be imaginative about the next move (just like assumations in DCF in fundamental investing ).
One needs to add macro factors and has to work as an artist. Few options needs to be rejected as one moves forward.Now that needs experience as well as deep study.

ii) You have to be ready to be proven wrong . Not an easy behaviour to adapt for human beings where 99 % people keep playing status games to satisfy their egos - the egos that are bigger than this whole universe.

iii) You have to be ready to contorl your emotions, cut the nosie around you and believe in your EW counts untill proven wrong. Again a behavioural fiancne problem- not an easy one to overcome.

Would like to add few more points :

(a) Apart from EW , I try to mix it Stage Investing, Conventional Patterns, Candle-sticks, moving averages, RSI ,MACD, BB ,Fib Ratios as well as Macros - so as to minimise the mistakes and to remove bias from my calculations.
If you look at this article Nifty Going to 12000?, we approcahed the market from different angles - EW was just part of it.

b) As far Rober Precher is concerend, he is not a good role model for an Elliotian. He does not change the view as the facts change - that’s not a sign of humble thus wise person. As an Elliotian, we need to be ready to change our view when new facts appear. Another point with him is that he keeps changing the original rules as per his convenience ( lot of differences between -1st edition of his book and the latest edition of his book )

Hope I answered your question .For me , EW helps to have approximately right entry/exits as well long term targets 75% of the times.

Sorry if you find my answer very long.

Am just trying to help others also who might have curious souls :grinning:.

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@StageInvesting

Thanks for the views explained in your write up. I think we definitely have to have some working theory , irrespective of the type of style we practice. For practitioners of EW, that would obviously remain the go to theory.

I personally have a more flexible approach. EW has been difficult for me so have given up on it. But there are a lot of other patterns which helps us in knowing about the market phases we are in. I think Mark Minervini’s Staging seems like an easy thing to learn and practice.

Coming to the nifty chart, we had a strong rally from 7500 to 15400, which was a one way rally and after that there was around 13 weeks sideways consolidation between 15400 to 14100. Nifty went up slightly higher and established another sideways trading range between 15450 to 15950. And this was followed by the frothy rally to 18600. And ever since Oct 2021, we have been in a corrective mode with the structure resembling an expanding triangle. My guess is the previous consolidation ranges between 15450-15950 and 15400-14100 should be looked out for support zones as previous consolidation zones are fertile grounds for support.

At current juncture we seem to be in a medium term correction and in the short term we could probably have made a very short term bottom/double bottom closer to 15700 and we need to see how it holds up. My guess is we might see a sharp short bounce after which there could be loss of momentum and how that dip plays out needs to be seen.

I think at current juncture, the bank nifty seems to be the pain point with these banking and financials having high weightage in nifty and that is adding to the pressure on nifty. Fundamentally a lot of these banking and financials stocks have shown decent results and commentary too remains strong. Though it is not amply reflecting in stock prices. I would be keenly observing for some kind of bottoming formation in these stocks. But as of now it seems to be missing.

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Sir -thanks for sharing your views on the market direction.

My bearsihness comes from two macro points :grinning:

a) US Fed actions and thus the fear of crash in tech bubble.
b) In most of the sectors in India, we see that all 5 waves have been done and now we’re in bigger wave 2 . Many of the big names in Nifty 50 also have now entered in their corrective phase. Can hardly find any stock that can support Nifty.

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BottomFishers - Alert For You

Market can remain irrational till you don’t become insolvent.

Would be sharing few downslide candidates (as per the technical studies ) today .

Disclaimer : These charts are to check whether technical-studies work ?Use your own discretion, these are probabilities set-ups. No certainity in life :grinning:

Hindcopper

How much it can fall ?

UPL
Is it going to enter Stage 4 - well let’s wait and see.

Indusind

Stage 4 -long way to if it works out. Let’s keep track.

LIC Housing

May bounce a bit - but it seems to be a bouncing egg…should break.

Let’s see!

IndiaBulls Housing

Some stocks never stop surprising you (on the downside :cold_sweat:)

Let’s see where it would make bottom.

HDFC AMC

A hope story gone wrong …how wrong it can go !

Tata Chem

Well chemicals are also whowing weakness or it is a bear trap !

Let’s wait and watch.

To get the full picture , read this Why most of the stocks in your portfolio have a downside risk ?

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Hindustan Zinc

Many a times you dont need complex trading systems.

Rectangle patterns are good examples.

If a stock is trading between a tight range, just draw a rectange around recent trading range and the height of the rectangle is the target (in % ge) -whatever side it breaks out .

Caution:This stock may take some counter-trend bounce temporarily as it is falling down for last few days.

Chart for the study purpose only. Let’s see how it plays out.