With the beginning of the new year i.e. the year 2022, investors are eager to know the future of equity markets. This curiosity is also high because the market has performed well in the last two years. But the factors that worked in these two years may not remain favorable around the world.
The rally, mainly from the low levels of March 2020, was mainly due to the relief package given by global central banks with low interest rates. The liquidity provided by this has not only relieved the financial markets from selling due to COVID, but also increased the valuation of all asset classes significantly.
After 20 months of policy support, central bankers are now at a point where they will be forced to withdraw some of the support. In the new year, the factors which led to the market rally in 2020 are not favourable.
Factors like inflation and rate hike will be important in 2022
Factors like inflation and rate hikes will be the main drivers of volatility in 2022. With prices rising around the world, central banks are set to raise interest rates. It is important for central bankers to start the cycle of rate hikes early.
Perhaps with this thought, the Bank of England raised interest rates by 15 basis points to 0.25 per cent in mid-December, despite concerns over the spread of the Omicron variant. Of the nine members of the Monetary Policy Committee, only one voted against the hike. If inflation continues, the Federal Reserve may raise rates several times in 2022.
Technical Setup for Nifty
Long term trend looks good and strong with 18 months rally. During this period, the index has gained 150 per cent to reach 18.604 from its March 2020 lows.
Historical analysis of Nifty data shows that this is not the first time that the index has shown continuous uptrend. After the global financial crisis of 2007, the Nifty climbed for eight consecutive quarters and rose 181 per cent to 6,338 levels from 2,252 in 2008.
Similar gains were seen in the six quarters between 2013 and 2015, when the index rose 78 per cent to 9,118.
On both these occasions, there was a sustained uptrend and then after several quarters of declines and a process of consolidation, it fell 29 per cent from the top in 2010 and 25 per cent from the top in 2015.
Going by historical behavior, the Nifty should be underperforming and we would not be surprised if the weakness and consolidation process continues for several quarters with a massive fall of around 20 per cent in 2022. With this historical price action we have heavy sell signals on the long term chart to further confirm our outlook.
Based on our Elliott wave counts on the long term charts, we are of the view that Nifty has started several quarters of decline with a break from the recent high of 18,604 and in the worst case target of around 15,000 (+/- 500) Nifty numbers).
However, an alternate count on our long-term Elliott wave charts is pointing to a new high in 2022 before a major decline.
If this calculation persists and unfolds in the next three to six months, the Nifty could see a fresh top between 19,500 and 21,411, paving the way for another 20 per cent decline with another 20 quarters of weakness.
The impact of the Omicron crisis can be seen on this. Some epidemiologists are of the opinion that at the end of its lifecycle the virus will mutate with less severity, and this is how the Spanish flu ended in 1895.
Despite its rapid spread, Omicron is not known to cause serious illness, so it may lead to herd immunity, which may lead to the end of covid. If this happens, it will be good for the world economy and it will mark yet another, rather final optimism in the financial markets for 2022.
Manzoor Mohammad is the Founder and Chief Market Strategist of Chartviewindia.in.
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