| Weekly Technical Analysis |  |
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| March 19,2012 |
| - By Vivek Patil, India's foremost expert in Elliot Wave Analysis |
Sensex turns volatile around Budget, ends flat however.
IIP growth surprises at 6.8% in 'Jan.
Loan recast set to hit a record Rs.1.5 lakh crs. in FY12.
Railway Minister proposes passenger fare hike, upsets Mamata.
Economic Survey predicts GDP accelerating to 7.6% and 8.6% in two years.
RBI dashes rate cut hopes citing inflation.
FM raises Excise and Service Tax by 2%.
Stock market unimpressed by the Budget.
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| Holding 17048 required to maintain positive options based on Extracting Triangle |
Last week we discussed, “If the c part is not impulsive, it is suggesting that our Zigzag assumption for the 3-week fall may not be justified … As an alternative, we could think of “b” of D still forming as an Extracting Triangle (instead of Zigzag) … Extracting Triangle can be suspected due to smaller b time-wise and due to smaller c compared to a … The Daily bias has turned positive, and would remain so as long as the Index is able to make higher high-low compared to previous day from here.”
Up 538 initially, Sensex crossed previous week’s high on 17692, and hit 18041 on Wednesday. Reacting 614 points before and after the Budget, however, it finished a marginal 37 points lower for the week. The action formed a Bear candle for the week, which, however, maintains a higher high-low compared to the preceding week.
While FMCG and Auto Index finished with gains, Realty, Healthcare and IT Indexes ended in loss.
Previously we considered the 7-week rally since Jan’12 to be “a” of larger D. Thereafter, the corrective phase over the last four weeks was considered “b” of D.
The “b” of D was initially thought to be a Zigzag, but was alternatively considered a likely Extracting Triangle due to absence of “impulse” in its c part.
As we know, Extracting Triangle is a 5-legged pattern, marked as a-b-c-d-e inside which drops get smaller and rallies bigger. (e < c < a and d > b). At last week’s high, the d achieved larger magnitude compared to b.
From last Wednesday’s high of 18041, the last leg, i.e. e, is going down. The assumption as to Extracting Triangle remain valid of e remains smaller than c.
Once all five legs are over, it would complete one higher-degree “b” inside the larger D leg, and “c” of D would move still higher.
While Glenn Neely coined the term “Extraction” based on “Expansion” and “Contraction”, the formation can also be seen as “extracting” or removing the power of the Bears, by way of smaller drops and bigger rallies.
The d part of an Extracting Triangle can end near-about the end-point of b part, and it did exactly that last week. The bpart had ended at 18001 (Nifty 5459), against which, d ended at 18041.
To prove our assumption of Extracting Triangle is correct, e should remain smaller than c. This will maintain the required e > c > aand d > b price-structure into the larger “b” of D.
Initial indication that ET is over would require strength above previous day, and final confirmation would be generated by complete and faster retracement of e part.
As long as previous day’s high fails to be taken out, the bias continues as negative. However, arresting or supportive tendency would be shown by holding previous day’s low or positive close.
Such an arresting behavior would be expected within 1-2 days. As we can see, post-Budget sell-off has reached close to previous Friday's gap-up area of 17239-326 (Nifty 5243-92). These levels are also near-about the crucial 200-day EMA.
Time-wise, each of the legs inside the assumed Extracting Triangle has, so far, consumed 3-4 days each. Perhaps e would also consume that much time.
As we observed, the fall from last Wednesday, which we are suspected to be e part of the Extracting Triangle, is already 2-3 days old. The e part should, if the contention of Extraction is true, end today or tomorrow.
Price-wise, “extraction” logic requires e to be smaller than c. This means if the Sensex drops below 17048 (Nifty 5210), then “extraction” logic gets invalidated.
To conclude, we may expect and watch if the there is buying opportunity at lower levels in the first 1-2 days of the next week. Bias remains negative otherwise.
We had suspected earlier that higher degree C leg from Nov’10 downwards ended on 9th Jan’12 as a Double combination.
This leg was also well-channeled, and enclosed a Neutral Triangle (from Nov’10 to Jun’11) and Contracting Triangle (from Jul’11 to Jan’12).
As we also observed, the 1st and 2nd corrective were exactly equal price-wise, both measured almost exactly 3800 Sensex points.
This discussion was chartically presented on the following Weekly chart of Sensex :
By NEoWave logics, most channeled moves enclose Complex Corrective structures involving “x” waves.
After breaking the 14-month long channel (from Nov’10), we suspected that current rally has potential to be marked as D leg of a much larger Triangle or Diametric from ‘2008. This option was preferable because C leg from Nov’10 is not an Impulse. Non-impulsive C leg could only be part of a larger Triangle or Diametric.
Inside this, the larger A leg was from Jan’2008 to Mar’2009. The B leg was from Mar’2009 to Nov’2010. The C leg came down from Nov’2010 to Dec’2011, as a channeled fall (Complex Corrective) with two equal standard correctives.
While A and B were equal-sized price-wise, C achieved time-equality (14 months) with A. Diametric picture was shown on the chart below :
By NEoWave logics, D leg of a Triangle can retrace minimum 50%, or ideally 61.8%, of the C leg. The 50% level was at 18123.At the last week’s high, D leg retraces C by about 57%. D of a Triangle or Diametric can even retrace as much as 80% or more of C leg.
If our assumption of larger formation from ‘2008 being Triangle or Diametric is true, D could remain smaller than C, i.e. not cross Nov’10 high of 21109. See the D leg marked during ‘1996-97 on the chart.
One may also note that the D leg during ‘1996-97 corrected 98% of C, and internally developed as a Flat, wherein “b” had retraced “a” completely.
We can see both the D legs as marked in Purple squares for the comparison.
[Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify the new arguments given in regular font]
Yearly lows
Sensex has broken ‘2010 low of 15652, and now in ‘2012 is found holding the ‘2011 low of 15136.
As the past instances would show, once the yearly low gets broken, a minimum of 20% cut from the low has been a usual phenomenon, though gradually. A 20% magnitude reduced from 15652 would calculate to about 12500 for Sensex.
This level matches with the huge gap-up action (refer to Weekly chart discussing 32-week cycle) seen during the ‘2009.
The chart given below shows equidistant parallel lines enclosing the development since Nov’10. Further, it shows how Sensex respected most of its important lows as resistances later.
However, for the first time since Nov’10, Sensex has been able to pierce though previous lows of 17800, and now appears re-testing the same.
32-Week time cycleThe development since Mar’09 has followed a 32-week time cycle, as shown on the chart below.
This had raised a possibility that an important low was may be formed around 20th Aug. Sensex responded by hitting the bottom on 26th Aug.
This raised the possibility of an upward/sideways phase that could survive for 32 weeks from Aug’11, and end either on 4thFeb’12 or 31st Mar’12, developing as a ranged movement like the Left Shoulder.
Going by the structural possibilities from this, it was suspected that Sensex could be forming an “e” leg of a possible Extracting Triangle, which would remain smaller than the “c” leg.
As we already know, Extracting Triangle is a pattern which shows smaller rallies and bigger drops. Thus in one direction, it shows e < c < a, and in the opposite direction, it shows d > b.
On one higher degree, Extracting Triangle (from Mar’09) would make up the larger B leg from Mar’09 lows of 8047, which is correcting the 14-month long A leg from Jan’08 to Mar’09.
Time-wise, this B leg ending Feb-Mar’12 would consume as much as 261.8% time compared to A, before C leg of the equivalent degree goes down.
Now above 18000, Right Shoulder has become bigger that the Left Shoulder, which may appear rejecting the Head & shoulders argument. However, the 32-week time cycle also matches with the 2-year cycle, and may therefore be watched.
We earlier assumed a Running Expanding Triangle developing since Nov’10. This assumption was later modified in favor of a Neutral Triangle from Nov’10 to Jun’11, which is followed by an “x” and then the 2nd corrective.
In the larger picture, the current phase has been assumed as C wave of an A-B-C formation from ‘2008. Since A was a 14-month affair and B consumed 20 months, the C could take 12 to 18 months to complete.
As we noted, C consumed 14 months.
As a result, the Expanding Triangle OR Neutral Triangle, whatever may be the case, was argued to be only the 1st correctiveinside a the larger C, which could develop itself into a Double Combination, similar to what S&P-500 Index did during ‘2000-‘2003.
As we discussed, C ended as a Double Combination of Neutral Triangle followed by Contracting Triangle.
C of a Flat has to be an “Impulse”. Since we are labeling the larger C leg from Nov’10 onwards as a Complex Corrective, it can only be part of a larger Triangle or Diametric developing from ‘2008.
This raises the possibility of post-2008 development getting compared to ‘1992-‘2003 period, when Sensex moved sideways for 11 years, looking like a Diametric formation.
All major tops are characterized by 30% drop from the top value. This is not only normal when a bear phase starts, but is seen inside a bull market too (as we saw during ‘2004 and ‘2006). The 30% taken out from the current top value on Sensex (21109) would be less than 14800.
The total loss so far, from the high of 21109 to 15425, measures as 28% cut so far. However, on BSE Small-Cap and MidCap Index, the loss from ‘2010 high does measured 30% or more.
Overall, it was argued much earlier, that we would see a topping formation spread over 2-3 month period beginning ‘Oct. This played out well as suspected. Indeed, as was observed, 60% of stocks topped out during ‘Oct’10 itself, and many have already shaved off much more than 30%. Sensex itself shaved off 28%.
Comparison with Jan'08 top formation
We can compare the current phase to the movement from Oct’07 to Jan’08, a 2.5 month period just before the high of 21206 was hit on Sensex. This was also an extremely volatile period of nearly two months, just before the market actually topped out.
The following chart of ‘2008 period shows two equidistant parallel channels. The Sensex broke above the original channel and achieved an equidistant height at the upper parallel, before reacting lower.
One may observe the volatile development once it reached closer to the upper parallel. Inside this volatility, the market faced number of sell-offs beginning Oct’07, before it finally topped on 8th Jan’08.
A similarity can be drawn for the ‘2010 top formation with the developments of ‘2008, as shown below.
Sensex held the lower Blue parallel, recovered to upper parallel. It is now testing the upper end of the falling channel.
2450-point Grid chart for the Sensex
Sensex has been following a Grid of 2450-2500 points since ‘2008. These Grids are shown on the Weekly chart of Sensex below. One can find a bottom or a top getting formed at each of the Grid levels.
Recently, heavy damage has occurred almost exactly from the Grid level at 17800. The next Grid level around 15300 proved support lately.
Sensex is now found breaking the Grid level of 17800, but is now turning a bit volatile around it.
 Our markets, remember, has seen multifold rallies previously, each time continuing for about 4 (four) years, after which, it usually enters a multi-year consolidation phase. In other words, “long-term” has always meant 4 years in Indian context.
Remember, Sensex rallied 11-fold from 390 (Mar’88) to 4546 (Apr’92) in four years, after which it consolidated for 11 years from ‘1992 to ‘2003.
In ‘2008, it completed another 4-year rally from ‘2003, during which Sensex rose 7-fold from 3000 levels to 21000. It may now consolidate for 7 year, beginning ‘2008, preferably forming as a Triangle or Diametric.
We explained the 14-month fall from Jan’08 as the “A” leg of large multi-year consolidation. The corrective phase beginning Mar’09 retraced about 80% of the previous fall from 21206 (Jan’09) to 8867 (Mar’09), (which was labeled as a Triple Combination).The longer time required while rallying is symptomatic of its corrective label “B”.
The rally from 8047 (actually beginning at 8867) was, therefore, considered as the “B” leg. The next leg downwards would be labeled as “C”. Such a-b-c development since Jan’08 would be considered part of the 2nd wave of what appears as a probable Terminal beginning ‘2003.
Even if we see the market reaching levels above Jan’08 highs, the multi-year consolidation is expected to shape up like a large decade-long Diametric, looking similar to the consolidation we saw from ‘1992 to ‘2003. Our trading/investment strategies should be designed accordingly.
The suspected corrective phase beginning Jan’08 would be the 2nd wave within the larger 5th wave. This 5th wave is suspected to be forming as a Terminal. Terminal confirms when the Sensex drops below the 2-4 line of one higher degree.
One may see the Yearly chart in Appendix, which shows the 2-4 line and its values for the next three years. Remember, Terminal development usually violates the 2-4 line.
The Sensex is assumed to be under the influence of a large 8-year cycle ever since its birth. As shown on the chart below, '1984 was the beginning of 8-year long bull-run till '1992. In my Super-Cycle Degree count, shown on ASA Long-Term chart under Appendix, I have, in fact, considered ‘1984 as the beginning point for the most dynamic 3rd wave.
The next two important turning points occurred exactly 8 years thereafter, in '1992 and '2000. Both these turning points were marked by stock market scams, because of which, the leaders of the rally had extremely difficult time later. For example, ACC, the leading stock of '1992 bull market, remained below its highs till end of '2004. Similarly, the IT stocks, which were leaders of '2000 rally, lost as much as 90% of their top valuations by the year '2003.
In the previous 8-year cycle top during ‘1992-93, Sensex lost 57% from 4546 to 1980. In the next cycle top, the cut was almost 58% from 6150 in ‘2000 to 2594 in ‘2001.
I had, accordingly, targeted sub-10k levels for Sensex price-wise, and a minimum of 13 months into bear phase time-wise. The price-time targets were achieved as Sensex dropped 63% from 21206 to 7697. The yearly channel, shown below, which I used earlier to project 20000 level for the Sensex during ‘2007, was broken when the Index moved below 17200. Break of this long-term channel also weighed in favor of the larger corrective phase following this 8-year cycle.
 Appendix : Long-term scenarios for Sensex
As for the larger-degree wave-scenarios, I consider two alternatives :
The first one assumes that a large Triple Combination corrective, beginning Sep'1994 got over in Oct'2005 at 7656. The last corrective within this Complex Corrective phase formed as a "Non-Limiting" Running Triangle. This has been my preferred scenario for many years, which I had assumed to be under development since I began long-term forecasting during ‘1997-‘1999. This one was the basis of “Forecast for the 21st Century” article published in Business Standard (which can be read on vivekpatil.com).
This scenario also combines well with the traditional channeling technique. Sensex followed a parallel channel for 11 long years from Apr'1992 to May'2003. As I had shown, if one projects the width of this channel on upper side, such a projection also gave 20000 as the “minimum” target. This forecast was achieved. This scenario is shown on the chart given below :
As per my second alternative, a Super-Cycle-Degree 3rd (or 5th) began since Nov’84. Its internal 3rd was an “extended” leg, which achieved exactly 261.8% ratio to the 1st on log scale. The Sensex is now forming its 5th Wave, and the same is likely to develop as a ”Terminal”, because its lower-degree 1st wave since May’03 developed as a Diametric (a “corrective” structure rather than an “impulse”).
Within the non-directional legs, 2nd was exactly 61.8% of 1st value-wise, and 161.8% time-wise. The 4th was 38.2% of 3rd value-wise, and 261.8% time-wise, as shown below.
Since the 5th is now more than 61.8% of 3rd, it may lead to a "Double Extension" scenario, wherein both 3rd as well as 5th would be extended waves. This scenario is shown on the the chart given below :
Development from May’03 is a 7-legged Diametric formation, marked as a-b-c-d-e-f-g. It is called "Diametric" because it combines two Triangular patterns, one initially “Contracting” up to the "d" leg, followed by an “Expanding” one. The contraction point is the "d" leg, and the legs on either sides of it tend to be equal. Accordingly, "c" and "e" were equal in "log scale", both showing about 60% gains. Similarly, "g" was equal to "a", both showing about 115% gain.
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The Diametric development from 2003 to 2008 has been considered as the 1st of the 5th. Due to the corrective structure in the 1stleg, larger 5th could be developing as a Terminal. Since ‘2008, we are into its 2nd wave, which could continue to develop over 8 years from ‘2008.
The "Double Extension" scenario was also shown on following ASA Long-term Index (chart below). I've created this chart combining Index compiled by a British advisor (from '1938 to '1945), RBI Index ('1945 to '1969), F.E Index ('1969 to '1980) and Sensex (thereafter till date).
The wave-count presented on ASA Long-term Index favors the alternate wave-scenario discussed above. The labels show that the market is into the lower-degree 5th of the SC-degree 3rd or 5th wave. If a "Double Extension" unfolds, Sensex could be projected to achieve even 50000+.
A break of 2-4 line would confirm the Terminal development inside the 5th, and would therefore, restrict the upsides to much lower levels than 50K, but end surely above 21000.
If the 5th proves to be a Terminal, one larger-degree label of 3rd will have to change to 5th, because only a 5th of the 5th can be a Terminal. The Super-Cycle-Degree marking for 1st and 3rd shown, would then change to 3rd and 4th respectively, as shown in White.
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Disclaimer : These notes/comments have been prepared solely to educate those who are interested in the useful application of Technical Analysis. While due care has been taken in preparing these notes/comments, no responsibility can be or is assumed for any consequences resulting out of acting on them. |
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