Will History repeat itself? A technical comparison of 2008 and 2020

The current CORONA crisis has not spared any country's economy. All major Stock Markets around the world has seen a sharp correction in their major Indices like Dow Jones (US), DAX (Germany), Hang Seng (HongKong), Nikkei (Japan), etc. Our economy is no exception with Nifty 50 hitting a low of 7500 in Mar'20 which is a 40% correction from a high of 12400 in Jan'20. You can look at the following weekly chart of Nifty 50 to notice its movement.

Figure 1: Weekly Chart of Nifty 50 (2020)

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2008 Financial Crisis

Most of you would remember the financial crisis of 2008. It was a nightmare for the world economy when the global financial system had crashed and some of them had filed for bankruptcy (Lehman Brothers). Let's see how Nifty 50 had reacted during that crisis.

Figure 2: Weekly Chart of Nifty 50 (2008-09)

If you observe the weekly chart of Nifty 50 during the 2008 financial crisis, you can see a phase of sharp correction followed by a good bounce. Bear markets are famous for good bounces in between the correction phase to disguise you of a bottom formation and entice you to invest at the same time. The ratio of Bounce to Correction was in the range of 65-75%. The overall correction from the high of 6300 in January to a low of 2250 in last week of October was around 64%.

After hitting a low of 2250, Nifty stayed in a range of 2500 to 3000 till Feb'09. It bounced back to its earlier high of 6300 only by Sep'10. Overall, it took 10 months to hit the bottom and 22 months to regain the all-time high.

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Comparison and Projection

I have tried to project the likely scenario if Nifty shows the same movement it had shown in 2008 financial crisis. The following table is a flow of Nifty's movement from 6300 in Jan'08 to 2250 in Oct'08. Overall correction from high of 6300 was 64%.

All the cells marked in grey color are projected levels of Nifty in 2020. I have considered the same percentage correction and bounce from May'20 to Oct'20 (to be conservative) as it has shown from Jan'20 to Apr'20, even though you can see a sharper correction in Nifty during Aug'08 to Oct'08.

The scenario projected here shows that Nifty will likely hit a bottom at 4700 and try to bounce back from that level. Considering the fact that it took 22 months to regain all-time high during 2008 crisis, 12400 level in Nifty is not likely to come before Sep'22.

Bear market are scary in correction but offers very high return in bounce backs. The end of Bear market marks the beginning of a multi-bagger return phase of a Bull market.

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You can analyse the data points mentioned here as per your understanding of the market and economy. I have tried to project a scenario in case History repeats itself (it actually does - a lot of time). There are multiple ways of making money in both the situations - falling and rising market.

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