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Last week it was argued that "16650 corrects post-16210 rally by 61.8%. It can be temporarily positive if Sensex holds this 61.8% level … Until any previous day's high is taken out, bias would continue negative … positive scenario would not only require taking out previous day's high, but also a decisive break above falling channel … Lack of acceleration from hereon could be considered a factor against bearish assumptions, even before the bias turns positive."
The week saw Index meeting all the positive parameters. Firstly, it lacked downside acceleration, then it took out previous day's high on Wednesday and broke the 6-day falling channel.
Forming an "out" candle, Sensex finished 3.8% higher for the week. Metal Index gained nearly 7%. All sectoral indices ended positive, except for the Healthcare Index.
Structurally, it was assumed that we may be into "c" of the a-b-c pattern from 17493.
Since last Wednesday, the Index has been trading above previous day's high, which continues the positive bias.
However, moves can remain subdued until its 'Oct high of 17493 is taken out. Such a subdued scenario is possible in view of the truncated Settlement week ahead of us, though bias continues to be positive until low of any previous day gets broken.
Last week's up-move was able to retrace the previous 6-day fall in 50% time. Such faster upside retracements provide positive structural indications. The ability to retrace a fall in 50% time gives an indication that the latest fall was, in fact, a Terminal.
Structure-wise, within the previously assumed bearish a-b-c structure since 17493, we can still continue to mark the up-move from 15331 as a "b" leg, perhaps until 'Oct high of 17493 is taken out decisively.
Previously it was also observed that "The treacherous progress of 'b' has been despite the net FII inflow of nearly Rs.10000 crs. during its formation … marginal returns form such inflows now appear reducing … the 86% up-move from 8047 (6th March'09) to 14931 (19th May'09) saw FII inflows of only Rs.25000 crs. Since 19th May, the FII inflows have shot up by further Rs.62000 crs, in response to which, market moved only 16% … Further FII inflows will risk the reducing marginal returns, and can come in only for safety, and not for returns."
With "b" touching equality with "a", an Elongated Flat was mentioned as a possibility, which can lead to an over-sized "c" leg, as was shown on the following chart. This scenario, remember, remains a possibility only as long as "b" maintains a near-equality with "a", i.e. as long as Sensex remains below 17493.
However, a sustained trading above 17500 would bring in the alternative scenario suggesting what went down from 17493 and ended at last week's low was an "x" wave, forming as a Double Failure Flat.
Under this bullish alternative structure, a Complex Corrective has been forming since 'March lows. Within this, the 1st corrective ended at 17493 as a Diametric, and 2nd corrective has opened from last week's low.
Under this alternative, the 2nd corrective can preferably be a Diametric, which can take the Sensex beyond 17500. If it's a Diametric, the size of the 2nd corrective would be about 5-6 months with a value target of 61.8% of the 1st corrective. This would calculate to 22000 on Sensex by May'2010.
If it turns out to be a Diametric (in the 2nd corrective), it could roughly follow the Blue channel shown on the following chart. If it is something else, it may follow the Red channeled path.
Even under this bullish alternative, the Complex Corrective structure would be labeled as the "b" leg of the multi-year larger Diametric structure from Jan'2008, just like the large consolidation we saw from '1992 to '2003.
Such a scenario would create a bubble-like situation in terms of valuation (PE Ratio). My earlier Chartacle (of 24th July), which provided guidelines for the last five months, will accordingly need to be modified to upsides targets of 17735 / 18100 / 18450 / 18900. This will be presented once 17500 gets decisively taken out.
On the Weekly chart given below, certain other alternative Diametric structure was shown, if the Sensex trades strongly above 17500. Within this Diametric, "a" and "c" are equal time-wise, both consuming 13 weeks [Fibonacci], but "c" is smaller than "a", and "d" is smaller than "b". The Diametric assumption will need Sensex to sustain beyond 17500, to open upsides of 18100-900 for its "e" leg.
Next week, we'll watch if the Sensex remains subdued, or goes in for a decisive surge above 17500 to reject bearish options.
[Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify the new arguments given in regular font]
The following chart compares last two rallies out of major downswings (which saw near-60% erosion in valuation), during '2003 and '2009. Both rallies are similar in terms of the time consumed and gains registered, both gaining about 115% in about 8 months.
On its maturity, the '2003 rally got retraced by 60% in 60% time, dropping to 4227 before the next move. If the current rally matures at the current levels, it could also show a 60% retracement (11850) by March'2010.
Will the history repeat itself ? Whether this happens or not, we need to be cautious on this front. Remember, the '2003 rally was part of the bull phase, while the recent rally was only a corrective "b" leg.
After showing falling volumes since 18th May, On Balance Volume (OBV) chart had shown a positive break above the Yellow resistance line.
However, after breaking the Violet color band, OBV is retesting the band and touching the Red line shown. Break above this Red line would be a positive indication.
Sensex maturing near 17500 would support my argument that market usually corrects after doubling. Ratio of 200% can be seen even for all the first rallies coming out of bear phases :
- After a 24-month bear phase during 1986-88, Sensex doubled from 390 to 798 and went into sideways consolidation for about a year before moving further up.
- After a 13-month bear phase during 1992-93, Sensex doubled from 1980 to 4643 and went into sideways consolidation for about four years before IT bubble happened in 2000.
- After a 39-month bear phase during 2000-03, Sensex doubled from 2904 to 6250 and saw a quick 60% retracement before resuming the bull phase.
Remember, 17500 is about twice the value of Oct'08 low of 7697 or 'Mar low of 8047.
I also explained my PE Ratio argument previously. I argued, "At its highest level of 15600 on Sensex, PE Ratio had reached 21+, which is near the maximum figure of 22 seen under 'normal' circumstances. Only bubbles can push it higher towards 28. Such bubbles happened during '2000 and '2008, which were 8-year cycle tops. It takes 8 years to build a bubble. Bubbles have never been seen in two consecutive years." Currently, as of this Friday, the PE ratio is at 23.07.
Previously, I assumed end of Triple Combination since Jan'2008, finishing at 8867 (20th Mar'09). Since Triple Combinations can occur only as a largest leg of Triangle, I contended that "we may be into the next upward wave, 'b' wave, which could correct the 14-month long Triple Combination by as much as 50%." Under Neo-wave Theory, 70% is the pattern implication for any Triple Combination.
However, I said "In Triangles, one can only have guesstimates. Triangles are exception to virtually all rules … As a general rule, one can say that 3 out of 4 retracing legs of a Triangle would retrace a "minimum" of 50%. (This ratio was, accordingly, used for projecting 14500 earlier).
The rally from Mar'09 did an exact 70% retracement to 14-moth fall. If the Sensex moves decisively beyond 17500, then the "b" leg can even travel further up, perhaps testing Sensex' 2008'highs.
In such a case, Sensex will go into a longer consolidation, lasting a decade or more, (similar to its consolidation seen during '1992 to '2003), though at a higher range contained within equidistant the parallel channel drawn for 1992-2003 period, and shown elsewhere (in Yellow color on a monthly chart).
The current "b" leg, in such a case, would become "b" of much larger Diametric (instead of "b" of Triangle I've assumed currently).
Since "A" leg consumed about 14-15 months since Jan'08, the entire Triangle, consisting of five legs, could consume 3 to 5 years, beginning '2008.
The suspected 3 to 5-year Triangle on Sensex would be the 2nd wave within the larger 5th wave.
The yearly channel, 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 as per 8-year cycle.
The 8-Year Cycle and its implications
The Sensex is assumed to be under a larger 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 a separate paragraph, I have, in fact, taken '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, and most are below their top levels even today.
Last year, we were sitting on this very important cycle, which therefore, threw up similar possibilities.
Remember, every 8 years, market does see a deep cut in valuations. In the previous 8-year cycle top during '1992-93, Sensex lost 56% from 4546 to 1980. In the next cycle top, the cut was almost 58% from 6150 in '2000 to 2594 in '2001. Time-wise, '1992 cycle completed the bear phase in 12-16 months, while the '2000 cycle took 19 months only to hit the low, which was then followed by 19 months of base formation before bull phase could begin again.
I had, accordingly, targeted sub-10k levels for Sensex price-wise, and a minimum of 13 months into bear phase time-wise. Index achieved the forecast price/time targets.
Alternative scenarios for Sensex
As far as larger wave scenario is concerned, I have been explaining 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, the breakout from which has already happened. This has been my preferred scenario for many years.
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. The forecast was achieved.
As per the alternative scenario, a Diametric developed into the 1st of the 5th leg. In this alternative, the 4th wave ended at May'2003 low near 2904. [The 5th leg, being a non-extended wave of the Impulse, should not have gone much beyond 61.8% ratio to the 3rd, which projected a maximum of 13300. In this argument, the 5th wave was assumed to be the "non-extended" leg within the 3rd which began at 259 in Nov'1984 as shown below].
The 3rd (of the 3rd) was shown to be the extended leg, which achieved exactly 261.8% ratio to the 1st on log scale. The 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.
However, the Sensex sustaining well above 13300, may lead to a "Double Extension" scenario, wherein both 3rd as well as 5th would be extended waves.
Diametric formation has 7 legs, 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, thereafter. 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" would be equal to "a", both showing about 115% gain.
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This Diametric development from 2003 to 2008 could be taken as the 1st of the 5th, which, due to corrective structure in 1st leg, could be developing as a Terminal. We may be into its 2nd wave, since '2008, which, could be forming as a Triangle.
The "Double Extension" scenario was also shown on ASA Adjusted Long-term Index chart. I've created this chart combining Index figures compiled by a British advisor (from '1938 to '1945), RBI Index figures ('1945 to '1969), F.E Index ('1969 to '1980) and Sensex (thereafter till date).
The chart shows the Super-Cycle-Degree count that I had been presenting since many years ago. The labeling shows that the market is into the 5th of the SC-degree 3rd wave. This 5th leg (within SC degree 3rd) may have begun either from 2904 (May'2003) or from 7656 (Oct'05). If a "Double Extension" unfolds, Sensex could be projected to achieve even 50000+. Break of 2-4 line, however, would confirm the Terminal development inside the 5th, and would therefore, restrict the upsides to much lower levels, though higher than 21206.
If 5th proves to be a Terminal, the larger label of 3rd will have to change to 5th, because only a 5th of the 5th can be a Terminal. The 1st and 3rd shown, would then change to 3rd and 4th.
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