Analyzing the NEPSE Index Using Elliott Wave Theory: A Comprehensive Technical Review

1.  Introduction 

1.1   Background

The Nepal Stock Exchange (NEPSE) Index, a pivotal barometer for Nepal’s financial markets, has witnessed significant fluctuations and developmental phases since its inception. As Nepal's economy transitioned from agriculture-based to a service-oriented structure, driven by the rise in remittances, tourism, and technological advancements, the NEPSE Index has become a critical focus for investors and analysts seeking to understand market behavior and future trends.

This article applies Elliott Wave Theory (EWT) to analyze the NEPSE Index from 1998 to 2023. EWT, founded by Ralph Nelson Elliott in the 1930s, posits that market movements follow repetitive cycles driven by collective investor psychology. By dissecting the NEPSE Index's historical wave patterns, this study aims to map out potential market cycles, identify key turning points, and provide forecasts based on observed wave structures.

The analysis covers the full spectrum of Elliott’s five-wave impulse sequence and three-wave corrective pattern, offering a granular view of NEPSE's Wave 1 through Wave 4, and projects the trajectory of Sub-Wave 5 within Wave 3. This examination incorporates crucial macroeconomic factors, including political stability, regulatory impacts, and economic shifts, that influence market behavior.

Understanding the NEPSE Index through the lens of EWT offers valuable insights into potential future movements and market psychology. However, this approach is not without challenges. The sensitivity of the Nepali market to external economic pressures and political instability can distort typical wave patterns, making precise forecasting complex. This article aims to balance the strengths of EWT with a recognition of its limitations, providing a nuanced analysis that considers both historical data and current market dynamics.

By exploring these aspects, the study contributes to a more comprehensive understanding of NEPSE’s wave structures and offers practical implications for traders and investors navigating this evolving market landscape. 

1.2   Key Assumptions for Elliott Wave Analysis of NEPSE

• Wave Structure: Expect five impulsive waves (12345) followed by a three-wave correction (ABC), as per Elliott Wave Theory.
• Historical Context: Nepal’s economic and political changes are crucial in shaping NEPSE’s wave patterns and market sentiment.
• External Influences: Global financial trends, foreign investments, and regional dynamics, especially with India, affect NEPSE and introduce additional volatility.

1.3   Elliott Wave Theory: Foundations and Modern Application

Elliott Wave Theory (EWT) Overview

Elliott Wave Theory, developed by Ralph Nelson Elliott in the 1930s, posits that market prices move in repetitive cycles reflective of collective investor psychology. This cyclical movement consists of two primary components:

1. Impulsive Waves (Five-Wave Structure): In a trending market, five waves delineate the primary movement. Waves 1, 3, and 5 are directional, aligning with the trend, while Waves 2 and 4 are corrective, temporarily countering the trend's progression. This five-wave pattern encapsulates the core momentum of the market's direction.

2. Corrective Waves (Three-Wave Structure): Post the five impulsive waves, markets typically undergo a corrective phase. This phase is structured in three waves, labeled A, B, and C. Wave A counters the prevailing trend, Wave B retraces part of Wave A, and Wave C extends further in the direction of Wave A, thereby completing the correction.

Prechter and Frost (2005) emphasized that “The waves reflect crowd psychology at different levels, ranging from optimism to pessimism, and thus give structure to price patterns.” This framework facilitates the anticipation of future price movements by mapping these emotional phases within the market cycle. 

Building on Elliott’s foundational concepts, Glenn Neely's Mastering Elliott Wave (1991) introduced advanced methodologies incorporating Fibonacci ratios to enhance predictive accuracy. Neely's integration of Fibonacci principles into wave analysis provides a robust mechanism for forecasting wave lengths and market reversals.

Advancements in Technical Analysis

In the digital age, technological advancements have revolutionized technical analysis. Real-time data analytics and sophisticated charting software have refined wave counting accuracy and the integration of technical indicators. These tools enable analysts to adapt Elliott Wave Theory to dynamic market conditions, providing more precise forecasts and insights.

Market Psychology and Participant Behavior

Understanding market psychology is crucial for effective Elliott Wave analysis. Different market participants influence wave patterns and market behavior:

• Retail Investors: Driven by emotions and market sentiment, their actions contribute to short-term volatility and often create significant market noise. 

• Institutional Investors: These entities base their decisions on comprehensive data analysis and strategic considerations, shaping longer-term market trends.
• Traders and Operators: Their focus on technical signals and short-term movements can impact wave patterns and market fluctuations.

By analyzing the interplay between these participant groups and leveraging modern analytical tools, investors can enhance their understanding of market dynamics and improve the precision of their Elliott Wave forecasts.

2.  Comprehensive Wave Structure Analysis of NEPSE (1998-Present)

Over the past two decades, the NEPSE index has displayed distinct cyclical patterns. Leveraging Elliott Wave Theory (EWT), we dissect NEPSE’s historical price movements into well-defined impulse and corrective waves. This detailed analysis covers: A thorough examination of each wave, including sub-wave structures, price trends, percentage changes, and timeframes, to elucidate the market's behavior and cyclical shifts.

By applying EWT, we gain insights into the cyclical dynamics driving NEPSE, providing a structured approach to understanding its price history and forecasting future trends.

2.1  Wave 1 (1998-2008): 150 to 1175 Points

Wave 1 marked a major uptrend as Nepal's market entered its growth phase.

2.2 Wave 2 (2008-2012): 1175 to 299 Points (ABC Corrective Wave)

Wave 2 was marked by significant corrections, typical of a ABC corrective structure.

2.3 Wave 3 (2012-Present): 299 to 3227 Points (Ongoing)

Wave-by-Wave Analysis of the Provided Table:

• Sub-Wave 1: Typically begins a new trend. In NEPSE’s case, Wave 1 (2012-2014) surged from 299 points to 1888 points (+531%). This is a significant rise, in line with EWT's expectations for Wave 1. The strong movement upward suggests a robust impulsive wave.

• Sub-Wave 2: A correction, usually retracing 38.2%-61.8% of Wave 1. NEPSE’s Wave 2 retraced 42%, falling to 1100 points. A 42% decline matches EWT's prediction that Wave 2 is typically a retracement of Wave 1. A retracement of 42% lies within the expected Fibonacci range (38.2%-61.8%).
• Sub-Wave 3: Generally, the strongest and most extended wave, at least 1.618 times the length of Wave 1. However, NEPSE’s Wave 3 rose by 193%, reaching 3227, which underperforms compared to Wave 1. Wave 3 should ideally have been longer than Wave 1. Its detailed explanation is done below with topic "A Critical Analysis of Sub-Wave 3’s Relative Length and Fibonacci Extension in Elliott Wave Theory".

• Sub-Wave 4: A correction wave. NEPSE saw a significant decline, with the index dropping to 1815 points (-43.8%), in line with typical Wave 4 behavior. This retracement is typical for Wave 4, as it generally corrects some of the gains from Wave 3. The 43.8% decline is within expectations based on Fibonacci levels.

• Sub-Wave 5: This wave can be the last impulsive wave, often extending beyond the prior high or moving up modestly depending on external factors. Wave 5 is often less impulsive than Wave 3 and the forecasting of this wave will be discussed in next part of this article. 

2.4 A Critical Analysis of Sub-Wave 3: Length and Fibonacci Extensions

2.4.1 Examination of Sub-wave 3

1. Sub-wave 3 Issue: The main point of concern is Wave 3's size. According to EWT, Wave 3 should not be shorter than Wave 1, but in this case, it is both shorter in percentage terms and less dynamic than Wave 1. This suggests a potential miscount or misinterpretation.

1. Remaining Waves: Waves 1, 2, 4, and potentially 5 seem to follow EWT guidelines more closely.

In Elliott Wave Theory (EWT), Wave 3 does not have to be the largest wave, but it must not be the shortest, and its length is typically expected to reach at least 1.618 times the length of Wave 1.

Fib Ratio Analysis:

If Sub-Wave 3 is more than 100% of Sub-Wave 1's length but less than 1.618, this could still be valid according to EWT. Let’s break it down further:

Sub-Wave 1 Length:

• Price Levels: 299 to 1888 = 1589 points

Sub-Wave 3 Length:

• Price Levels: 1100 to 3227 = 2127 points

Length Comparison:

• Sub-Wave 3 relative to Sub-Wave 1:
• Ratio = (Length of Wave 3) / (Length of Wave 1) = 2127 / 1589 ≈34
• Thus, Sub-Wave 3 is approximately 134% of the length of Sub-Wave 1

Interpretation Using Fibonacci Ratios:

• Wave 3 length relative to Wave 1: According to Fibonacci extensions, a typical Wave 3 extension is 1.618 times Wave 1, or greater. However, 1.34 times Wave 1 is also acceptable, as long as it is greater than 100%, which is indeed the case here.

• Why it's valid: Although 1.34 is less than the ideal 1.618 Fibonacci extension, EWT does allow for variations in how far Wave 3 extends. The primary requirement is that Wave 3 is not the shortest wave, which it clearly isn't here as it surpasses 100% of Wave 1's length.

2.4.2 Historical Context of NEPSE at All-Time High (3227)

When NEPSE reached its all-time high of 3227 in 2021, the regulatory body released a list of 51 companies under scrutiny and introduced caps on share loan facilities by the central bank. These regulations heavily impacted liquidity, leading to significant market sell-offs.

Central Bank Policy:

• Loan limits were capped between 4 to 12 crores per entity across multiple BFIs, significantly tightening the flow of capital into the stock market. This policy triggered panic selling as liquidity dried up, leading to a sharp decline from 3227 to 1815 points.

Analysts' Projections:

• Many analysts had projected NEPSE to continue its bullish trend and possibly reach 4000 to 5000 points, but the unexpected regulatory constraints resulted in a large-scale selloff. The market then oscillated between 1800 and 2200 points for nearly two years (2022-2024), with investors wary of new regulatory risks.

Regulatory actions and central bank interventions have historically played a crucial role in stock market performance. In NEPSE’s case, the restrictive loan cap policy led to suppressed growth in Wave 3 and triggered a sharper-than-expected correction in Wave 4. A similar situation was observed in markets like China’s Shanghai Stock Exchange, where regulatory clampdowns caused major selloffs after strong waves.

2.5 Projection for Sub-Wave 5 of Wave 3

2.5.1 Wave 5 Behavior in Elliott Wave Theory

Wave 5 is typically the final impulsive wave in an Elliott wave cycle. Its behavior is influenced by various factors, including market sentiment, external regulatory interventions, and the performance of Waves 1 and 3. Given that both Sub-Wave 1 and Sub-Wave 3 of the Wave 3 in the NEPSE index did not perform exceptionally (relative to what is typically expected), the nature of Wave 5 becomes crucial.

Here are the typical scenarios for Wave 5: 

1. Wave 5 as an Extension of Wave 1 or Wave 3:

When Wave 1 and Wave 3 are weaker: Historically, when both Wave 1 and Wave 3 are relatively weaker or face heavy regulatory or external challenges, Wave 5 is often extended. In foreign markets, there are many cases where Wave 5 surpasses the previous all-time high, especially when the regulatory environment stabilizes or market sentiment turns positive again. Several stock markets have experienced similar situations where regulatory and political factors heavily influenced the development of Wave 5:

• Nikkei 225 (Japan) in the late 1980s: After a sluggish Wave 1 and Wave 3, the market surged in Wave 5 due to improved liquidity policies.
• NASDAQ Composite during the 2000s tech bubble: Despite challenges in earlier waves, Wave 5 extended dramatically due to market sentiment and technological optimism.
• Shanghai Stock Exchange (2015): Regulatory clampdowns in China caused a sharp correction after a strong Wave 3, much like NEPSE. The market recovered in Wave 5 but never reached the full potential initially projected due to ongoing regulatory challenges.

1. Wave 5 and Fibonacci Extensions:

Fibonacci Projections for Wave 5: In EWT, if Waves 1 and 3 underperform, Wave 5 can still extend, often in alignment with Fibonacci projections. Here are some key levels to consider:

Wave 5 can be equal to Wave 1 (100%): This is a conservative expectation, especially if the market has already experienced significant regulatory pressures. For NEPSE, this would suggest a modest rise.

Wave 5 can extend to 61.8% or 100% of Wave 3: If the market sentiment improves, as might be the case with the current government focusing on stock market reforms, Wave 5 could extend further. Historically, if Wave 1 and 3 are weaker, the 61.8% to 100% extension of Wave 3 becomes more likely, as Wave 5 makes up for the previous sluggish waves.

Wave 5 reaching the 1.618 extension of Wave 1: In strong Wave 5 scenarios, particularly with foreign stock markets like S&P 500 or FTSE 100, this level has been reached when market fundamentals improved significantly after regulatory or economic issues.

1. Psychological and Regulatory Factors in NEPSE:

As mentioned above, regulatory interventions like loan caps from banks and actions against companies significantly dampened market sentiment at NEPSE’s all-time high (3227). Similar interventions in other markets, such as China's stock market, resulted in reduced investor confidence, leading to weaker waves.

If the current government and central bank take a more favorable approach to the stock market, and if investors regain confidence, the market could experience a strong Wave 5, especially as confidence builds after a long period of sideways movement. The shift in political alliances could further play a role in shaping market sentiment.

2.5.2 Likely Extension for NEPSE’s Sub-Wave 5 of Wave 3 

In projecting Sub-Wave 5 of Wave 3, we use Fibonacci extensions based on prior wave lengths.

a. If Sub-Wave 5 extends by 61.8% of Sub-Wave 3:

Sub-wave 3 extended from 1100 to 3227, a 2127-point move. Applying the 61.8% extension from the low of 1815:

1815+(2127×0.618) = 1815+1314.7 ≈ 3130 points

b. If Sub-Wave 5 extends by 100% of Sub-Wave 1:

Sub-wave 1 spanned 299 to 1888, or 1589 points. If sub-wave 5 of Wave 3 mirrors this length:

• 1815+1589 ≈ 3400 points

c. If Sub-Wave 5 extends to the length of Sub-Wave 3 (100%):

Sub-wave 3 extended from 1100 to 3227, a 2127-point move. Applying the 100% extension from the low of 1815:

• 1815+2127=1815+1314.7 ≈ 3945 points

d. If Sub-Wave 5 extends by 1.618 of Sub-Wave 1:

Sub-wave 1 spanned 299 to 1888, or 1589 points. Applying the 1.618 extension from the low of 1815:

• 1815+(1589×1.618) = 1815+1314.7 ≈ 4385 points

Key Conclusion for NEPSE’s Wave 5:

• Scenario 1: If the market remains cautious but improves steadily, 3400 points (100% of Wave 1) is a realistic target.
• Scenario 2: If investor confidence significantly improves due to positive government and central bank actions, 3942 points (100% of Wave 3) or even 4385 points (1.618 extension of Wave 1) could be plausible targets.

However, keep in mind that external factors like political changes, global economic conditions, and investor sentiment will play key roles in determining the final outcome of Wave 5. A stronger extension toward and above 4385 points would require significant positive shifts in market sentiment, government policy, and investor confidence. While foreign market history shows that such extensions are possible, caution is warranted given the specific political risks in NEPSE’s case.

Here's a projection table based on the calculation made above for NEPSE's Sub-wave 5 of Wave 3:

Market Sentiment and Behavioral Influence

One of the key challenges in forecasting NEPSE using EWT is the role of market sentiment. Prechter’s research highlights the psychological factors that drive market cycles. In the case of NEPSE, retail investor behavior, speculation, and sudden market entry by new participants can cause waves to overextend, particularly in smaller, more volatile markets.

Analysts like Glenn Neely suggest that during times of irrational exuberance, fifth waves can extend much farther than expected, hence why we projected the moderate and aggressive scenario for Sub-wave 5 of Wave 3.

2.5.3      Sub-Wave 5 Projection: Economic, Political, and Technological Insights

To conclude the projection of Sub-Wave 5 for NEPSE, we must incorporate several key factors related to Nepal’s economy, regulatory changes, technological advancements, and external influences. Let’s take a detailed look at how these dynamics might influence the development of the NEPSE index and the behavior of the upcoming sub-wave.

Economic Transition & Sectoral Shifts

Nepal’s economy has moved from agriculture to a service-oriented model, heavily reliant on remittances and tourism. The pandemic significantly impacted tourism, but the sector is recovering, creating optimism in the market. The government, struggling with declining tax and customs revenues, has turned to capital markets and IPOs to raise funds, leading to increased market participation.

Regulatory & Policy Changes

    1. Margin Loans by Brokers & Removal of Loan Caps

In its recent monetary policy (FY 2081-82), the Nepal Rastra Bank (NRB) addressed the concept of margin loans from brokers, though this is yet to be fully implemented. The NRB has removed the previous cap of Rs. 200 million for institutional investors borrowing against shares. However, a cap of Rs. 15 crore still applies to individual investors borrowing from BFIs (Banks and Financial Institutions).

The central bank has also provided approval to 34 stock brokers to encourage margin trading, aiming to reduce direct lending from BFIs and stimulate capital market growth through brokers.

    2. Government and Regulatory Alignment

With the government and central bank both pushing for stock market growth, regulatory bodies are working on implementing effective laws for margin trading. Political alignment may encourage stock market expansion, though potential political instability from coalition breakdowns remains a risk that could curtail momentum.

Technological Advancements & Increased Market Participation

   1. Online Trading Systems (TMS)

The introduction of Trading Management Systems (TMS) and lower internet costs have made stock market participation more accessible, especially for retail investors. The democratization of stock trading is expected to drive market activity in Wave 5.

   2. NRNs and Foreign Participation

The potential inflow of funds from Non-Resident Nepalis (NRNs) and increased foreign participation are important bullish factors for the market. Nepal could follow the path of other developing countries that saw extended stock market rallies driven by foreign investments.

Impact of Key Sectors and IPO Pipelines

   1. Hydropower, Insurance, and Tourism 

The hydropower sector, with more than 100 companies, remains a key driver of economic growth. Similarly, the insurance and tourism sectors are expected to recover as post-COVID activity increases. These sectors could contribute to a sectoral rotation, typical in a Wave 5 phase, where certain industries outperform and drive the broader market.

   2. Upcoming IPOs

A pipeline of IPOs is anticipated, which can attract more investors and increase liquidity. Historical data from countries like India and Vietnam shows that a wave of new IPOs can trigger extended bull market phases.

Economic and Technological Shifts During 2018-2020

During the COVID-19 pandemic (2020), Nepal experienced a shift toward digital platforms, leading to a rise in online stock trading. Despite the economic slowdown, liquidity in the stock market was maintained, and the number of retail investors grew. This shift, combined with the use of TMS, has the potential to significantly impact Wave 5 as more retail traders enter the market.

Considering the recent regulatory changes, technological improvements, and growing participation in the market, NEPSE’s Sub-Wave 5 could project to between 3130-3945 points, with a bullish case extending up to 4385 points. The government's focus on market reforms, coupled with increasing investor confidence and the potential inflow of foreign funds, could drive this next leg of the bull market. However, investors should remain cautious of political and regulatory risks that could limit growth. 

2.6 Forecasting Wave 4: Sub-Wave ABC Structure

Once sub-wave 5 of Wave 3 completes, we can anticipate a corrective Wave 4 that will likely manifest in a standard ABC structure, typical of Elliott Wave corrections. Wave 4 corrections are usually complex and involve sideways movement or retracement.

Wave 4’s sub-waves (A, B, and C) would likely unfold over several months, making the market volatile and harder to trade without proper risk management strategies.

Key Economic and Market Considerations for Wave 4:

 1. Government Policy & Market Reforms:

• The government’s alignment with the central bank and its focus on capital markets could soften the correction, possibly keeping it closer to 23.6% or 38.2% retracement levels.
• If regulatory reforms (margin loans, broker participation) come into effect swiftly, the correction may be less severe.

 2. IPOs & Market Liquidity:

• A steady flow of IPOs could provide additional liquidity, potentially mitigating the impact of the correction.
• However, if IPOs don’t meet expectations, or if liquidity dries up, the market could see a deeper correction, possibly reaching the 50% retracement level.

Investor Sentiment & Global Factors:

• The global economic situation, along with domestic issues like youth migration and dependence on remittances, could influence investor sentiment.
• Any political instability or coalition government breakdown could trigger a larger decline, particularly if Wave C overshoots Wave A.

Investors should remain cautious of external risks such as political instability and global economic conditions, which could amplify the corrective phase.

3.  The Role and Impact of Elliott Wave Theory in NEPSE

Elliott Wave Theory is crucial for analyzing markets like NEPSE, where market dynamics are influenced by liquidity constraints, speculation, and macroeconomic factors that often obscure natural patterns. While EWT offers valuable insights into potential market reversals and trends, its application requires careful consideration.

Key Advantages of EWT for NEPSE:

• Forecasting Market Reversals: EWT aids in identifying potential market tops and bottoms, providing early signals for major trend changes.
• Wave Identification: By analyzing impulse and corrective waves, traders can better understand market cycles and position themselves effectively.
• Fibonacci Ratios: These ratios offer reliable targets for price movements, enhancing the accuracy of trend and correction forecasts.

Challenges and Considerations:

• Political and Economic Instability: NEPSE's sensitivity to political and economic shifts can disrupt EWT patterns, complicating predictions.
• Speculative Retail Activity: Excessive speculation can distort wave formations, leading to inaccuracies in forecasting.

Overall, while EWT is a powerful tool for understanding NEPSE's market behavior, its effectiveness can be impacted by external factors and market sentiment.

4.  Weaknesses and Limitations of Elliott Wave Theory

While EWT offers a structured way to interpret market movements, it is not without its limitations: 

• Subjectivity in wave counting: Analysts can interpret wave structures differently, leading to conflicting projections.

• External influences: Global and local factors, such as political events or natural disasters, can cause waves to behave unpredictably.

• Macroeconomic shocks: These can disrupt the wave pattern, leading to false signals or overextended waves.

• Complexity: Accurate wave counting is challenging, especially in volatile markets.

• Historical Failures: Instances where EWT did not align with market trends due to unforeseen events or deviations from expected patterns, such as the Dot-Com Bubble, the 2008 Financial Crisis, Brexit, and the COVID-19 Pandemic.

• Over-Reliance on Historical Patterns: EWT relies on historical patterns which may not always repeat or apply to current market conditions, leading to potential inaccuracies.

• Difficulty in Timing: Even if wave patterns are correctly identified, predicting the exact timing of market movements remains challenging and uncertain.

• Lack of Quantitative Basis: EWT is largely qualitative and subjective, lacking the quantitative rigor found in other analytical methods, which can affect precision in predictions.

5.  Historical Failures of Elliott Wave Theory (EWT)

Elliott Wave Theory (EWT) is a widely used analytical tool for understanding market trends, but it has its limitations and occasionally fails to align with actual market movements due to unexpected events or deviations from anticipated patterns. Here are notable instances where EWT struggled to predict market behavior.

1. The Dot-Com Bubble (1999-2000)

Context: The late 1990s saw a tech-driven market rally. EWT analysts expected a correction based on wave counts.

Deviation: The market surged beyond typical Elliott Wave projections due to excessive investor enthusiasm and speculation in tech stocks.

Outcome: The burst of the Dot-Com Bubble led to a sharper and more prolonged decline than EWT had predicted, revealing its limitations when faced with intense speculative activity.

2. The 2008 Global Financial Crisis

Context: Pre-crisis forecasts by EWT analysts anticipated continued bullish trends and standard corrective patterns.

Deviation: EWT failed to foresee the severity of the subprime mortgage crisis and the global financial meltdown.

Outcome: The crisis resulted in a market crash far exceeding EWT projections, underscoring the theory's difficulty in predicting during extreme economic stress.

3. The Brexit Vote (2016)

Context: The Brexit referendum's unexpected outcome led to market volatility.

Deviation: EWT did not fully anticipate the immediate market impact or the sharp movements triggered by the Brexit vote.

Outcome: The market’s reaction included significant volatility and a rebound that diverged from EWT forecasts, highlighting the theory's struggle with sudden geopolitical shocks.

4. The COVID-19 Pandemic (2020)

Context: The pandemic caused a global economic crisis, presenting new challenges for EWT analysts.

Deviation: The rapid and severe economic impact led to market movements that deviated from standard Elliott Wave patterns.

Outcome: The pandemic-induced market volatility and recovery were irregular and beyond typical EWT predictions, illustrating the theory's limitations in extraordinary global crises.

Relevance for NEPSE Traders

These historical examples illustrate the importance of recognizing EWT's limitations. While EWT can be insightful, traders in NEPSE should consider additional factors and analytical methods, especially during periods of significant economic, geopolitical, or health-related disruptions. A nuanced understanding of these limitations can aid in making more informed trading decisions and managing risks effectively.

6.  Conclusion & Findings

This analysis of the NEPSE Index through Elliott Wave Theory (EWT) underscores the potential of Sub-Wave 5 within Wave 3, projecting a target range of 3130 to 3945 points, with an optimistic extension up to 4385 points. This projection is informed by historical data, Fibonacci ratios, and current market dynamics.

Key Influencing Factors:

• Political Stability: Ensures investor confidence and market growth.
• Economic Reforms: Enhance liquidity and valuation.
• Technological Advancements: Attract investors and improve market performance.
• Global Economic Trends: Affect overall market sentiment.

Challenges in Forecasting Wave 4:

• Market Volatility: Makes corrective patterns unpredictable.
• Economic and Political Instability: Can lead to deviations from expected wave patterns.
• Speculative Influences: Contribute to irregular corrections.

Findings:

1. EWT's Strengths: Useful for identifying potential market trends and turning points.
2. EWT's Limitations: Can be disrupted by instability and speculative activity.
3. Need for Adaptability: Investors should use EWT in conjunction with other analytical methods and remain aware of broader economic conditions.

Elliott Wave Theory provides valuable insights into NEPSE’s potential trajectory but should be complemented by a broader analysis of economic and market factors to enhance forecasting accuracy and investment strategy.

7.  References

Frost, A. J., & Prechter, R. R. (2005). Elliott Wave Principle: Key to Market Behavior (10th ed.). New Classics Library.

Glenn, N. (1991). Mastering Elliott Wave: Presenting the Neely Method: The First Scientific, Objective Approach to Market Forecasting with the Elliott Wave Theory. Windsor Books.

Murphy, J. J. (1999). Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications. New York Institute of Finance.

Prechter, R. (1999). The Wave Principle of Human Social Behavior and the New Science of Socionomics. New Classics Library.

Sharma, S. R. (2018). The Impact of Political Instability on Stock Market Returns: A Case Study of Nepal. Journal of Finance and Economics, 6(1), 34-41. https://doi.org/10.12691/jfe-6-1-4

Thapa, R. (2020). Macroeconomic Factors Affecting Stock Prices in Nepal Stock Exchange. Economic Review, 32(1), 78-96. https://www.nrb.org.np/economic-review/

Zhou, Y., & Sornette, D. (2004). Crisis and Recovery in Financial Markets: Applications of Wavelet Transform to High-Frequency Time Series Analysis. Quantitative Finance, 4(2), 1-20. https://doi.org/10.1080/14697680400008317

Nepal Rastra Bank. (2022). Annual Report 2021/22. Kathmandu: NRB. https://www.nrb.org.np/annualreport

Nepal Rastra Bank. (2022). Monetary Policy 2024/25. Kathmandu: NRB. https://www.nrb.org.np/contents/uploads/2024/08/Monetary-Policy-in-English-for-2024-25.pdf

Shrestha, P. (2019). Technological Innovation and Its Impact on Stock Market Efficiency: A Study on NEPSE. Kathmandu School of Economics Research Journal, 8(1), 45-60.

Subedi, P. (2016). A Psychological Perspective on Stock Market Movements in Nepal: Understanding Investor Behavior. Nepal Economic Forum Review, 4(2), 23-29.

TradingView. (2024). NEPSE Historical Data and Chart Analysis. https://www.tradingview.com/symbols/NEPSE

8.  Disclaimer

The projections and analyses presented in this article are based on Elliott Wave Theory and are intended to provide a general framework for understanding potential market trends. While every effort has been made to ensure the accuracy of the data and analysis, it is important to recognize that market movements are inherently unpredictable and influenced by numerous variables that can shift unexpectedly.

Elliott Wave Theory, like other technical analysis methodologies, offers a structured approach to analyzing historical price movements and forecasting future trends. However, it cannot fully account for all external influences, such as political developments, economic shifts, technological advancements, or unforeseen global events that may significantly impact market dynamics. Therefore, the analyses and projections provided in this article should not be considered definitive financial advice or guaranteed predictions.

Investors should be aware that market forecasts come with inherent uncertainties, and past performance is not always indicative of future outcomes. It is crucial to approach any market analysis with caution, applying sound risk management practices, such as portfolio diversification, to mitigate potential losses.

Readers and investors are strongly encouraged to conduct thorough personal research and seek the counsel of professional financial advisors before making any investment decisions based on the information contained in this article.

By engaging with the content of this article, you acknowledge and accept that the author and affiliated parties are not liable for any financial losses or investment decisions arising from the use of the information presented herein.

About Author:

Prakash H Niraula
Master's in Business Studies, Specialization in Accounting, 2024, TU

Prakash H Niraula holds a Master’s degree in Business Studies with a specialization in Accounting from Tribhuvan University, completed in 2024. With extensive experience in the Nepalese stock market (NEPSE) since 2015, Prakash has developed a deep understanding of market dynamics. His expertise is further enhanced by a thorough study of price action and Elliott Wave Theory, gained through meticulous market observation and historical data analysis. Prakash’s insights into the market are informed by extensive readings of books and articles and active engagement with live market trends.