| Weekly Technical Analysis |  |
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| April 09,2012 |
| - By Vivek Patil, India's foremost expert in Elliot Wave Analysis |
Sensex fails to move above previous high of 17687, ends almost flat.
Finance Ministry refuses to roll-back anti-tax avoidance framework.
FM warns slow economic growth may hurt banks' asset quality.
British Govt calls for greater predictability in Indian tax laws.
Govt remains firm on its decision to amend I-Tax act retrospectively.
Factory output growth in 'March lowest in '2012.
Supreme Court declines to reconsider its order canceling telecom licences.
Jewellers call off strike on excise duty roll-back hope.
Coal block auction to test CAG's loss estimates.
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Rally fails to generate faster retracement of fall, "b" continues to form as a result
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Last week we discussed, “On its Weekly chart, Sensex created a Hammer-like candle and an Upward Bar Reversal … This has raised positive expectations, to be confirmed on strength above Friday’s high of 17440 (Nifty 5307) … faster retracement to fall may confirm last falling segment was g of Diametric … we have 4 more sessions to generate the required faster retracement … Lack of faster retracement above 17687 (Nifty 5386) would mean a Complex Corrective involving “x” wave… The bias may be assumed as +ve as long as Sensex refuses to close below previous day’s low. Caution should be exercised otherwise.”
In the 3-day truncated week, Sensex initially traded above the Weekly Hammer, i.e. above 17440 (Nifty 5307), and touched a high of 17664 (Nifty 5378). This high, however, failed to cross 17687 (Nifty 5386). Gapping down on the last trading day (Wednesday), Index finally ended a marginal half a percent higher, creating an Inverted Hammer like pattern on its Weekly chart. This was despite the 3% plus gain in Capital Goods, Power and Small-Cap Index.
After a huge Bull candle on previous Friday (i.e. 30th Mar), the next two Bull candles for Monday and Tuesday formed gradually smaller in size. This indicated loss of upward momentum.
Indeed, Tuesday’s candle formed as an Inverted Hammer, which was followed up with a gap-down Bear candle on the last trading session of Wednesday.
Further weakness and close below Wednesday would not only maintain the -ve bias on the Daily chart, but would also confirm failure to retrace the preceding 5-day fall from 17687 (Nifty 5386) in faster time.
Such a weakness would also be considered a bearish follow-up to the Island on the Daily chart, and prove the same as a Reversal pattern.
As for the Weekly chart, which shows Inverted Hammer for the last week, weakness below its low of 17382 (Nifty 5278) would provide a bearish sign, and turn the Weekly bias negative.
Structurally, with each leg not lasting beyond 3-4 days, the development inside “b” of larger D was indicating a Diametric formation, as we marked.
As long as the Sensex fails to retrace a falling segment, “b” would continue to form.
Inside the larger D, “b” was considered to be a corrective phase to “a”. By NEoWave logic, corrective phase usually consumes greater time than the move it is correcting.
As one may note, “b” has consumed 30 trading sessions, which achieves a time-equality with “a”. Price-wise, “b” has so far retraced only about 50% of “a”.
Due to this price-time ratio, “b” even visually looks slower, justifiably as a corrective phase to “a”.
Since “b” has been a slower, meandering development, putting an exact wave-count may be difficult. However, considering each leg did not last much more than 3-4 days, the possible wave-structure is that of a Diametric, as shown on the charts, and the last rally an “x”.
As per NEoWave, the percentage of original move that a corrective phase would retrace, is usually decided by the formation inside the original move. In our case, the “a” of D was marked as a possible Double Zigzag, a well-channeled move enclosed inside two parallel lines.
As per NEoWave, a Double Zigzag carries pattern implication of 61.8% to 80% retracement.
Therefore, until we see an upside faster retracement of a falling segment, “b” continues to form, and carries the possibility of 61.8% to 80% retracement to the “a” leg.
As per NEoWave theory, exception to 61.8% to 80% pattern implication can be made only for a leg of a Triangle, Terminal or Diametric. With “b” correcting only 50% of “a” so far, such an exception could prove by holding 50% and generating a faster retracement to a falling segment.
Only on faster retracement of the last falling segment, one would be able to confirm that “b” is over, and “c” of D has opened upwards.
As was pointed out, as per NEoWave logics, a move in opposite direction usually starts with a faster retracement of the last segment of preceding structure.
Lack of faster retracement would suggest a continuing “b”, developing as a probable Complex Corrective involving “x”wave at last week’s high, as marked.
We had earlier suspected 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, but now appears turning volatile around it.
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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