Hearing stories of suicides among Indian traders and the government watching over places of potential suicide, you’d think that the Bombay exchange had completely collapsed, but when you take a look at the chart you’ll see it’s a very normal, albeit swiftO correction of about 20%. 

With India’s Bombay stock exchange nearly tripling over the past 2 years, a significant correction was a matter of time.  Of course hindsight is 20/20 but to be betting your livelihood up at those levels is insanity.  You would have hoped that given the lessons of the US stock market collapse of 2000 that lessons would have been learned but greed is a powerful emotion and will continue to get the best of traders.  So what happens now.. where to next?  The charts can provide some clues.

Here’s a long term chart of the Bombay India stock exchange, showing the tripling of the market in the past 2 years.  Could you call this a crash?  With support of the 200 day moving average, the one year trend line and the two trend line still intact… hardly.  An important piece of this chart is the parabolic rise above the upper channel of the 2 year trend line with what I would call non existent buy volume.  This 20% drop is merely a return to normalcy and nothing more .. or least for now.  Considering where it came from, a 30% drop from the highs to the 2 year trend line wouldn’t be out of the ordinary.  So the most likely scenario is another 10% drop or so from current levels.

The Bombay doesn’t provide us with any volume level clues, but the closed end India funds (IIF) and (IFN) can provide us with those clues.  What stands out is the severity of the decline and the intensity of the sell volume.  Both would indicate that India is far from a bottom.  Presumably, a considerable amount of fear will need to be worked through in the coming months before the Bombay can rally gain.  I don’t think we’ve seen the lows just yet.

Of the two closed end funds, Morgan Stanley’s India Fund (IIF) is in the worst shape having violated the 2 year (approx.) trend line.  While it currently has support of the 200 day moving average, the severity of the decline would have me believe that it won’t hold there.  I’m not seeing any definitive support areas below the 200DMA, so no telling where it goes from there.  

The India Fund (IFN) is better diversified than IIF (which is heavily weighted towards industrials) and more representative of the overall Bombay Exchange, but having the advantage of volume clues.  Focusing on this closed end fund will provide us with the best clues.  Let’s have a look.

IFN too had jumped ahead of itself at the beginning of May when it surged above the upper channel of a one year trend and is returning to a more reasonable level.  It should test the bottom of that trend in the coming weeks in the 44-45 range.  Look for a continuation of the bounce followed by a testing of that support.  So.. another 10% or so in the IFN.  Let’s see how it does there.