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Last week it was argued that "'b' leg consumed exactly 261.8% time ratio to 'a' (26 days against 10 days consumed by 'a') … In order to confirm completion of 'b', Sensex needs to break the 0-b line, followed by drop below 16210 … Friday's 300-point intra-day reaction has makings of a sudden reversal … it could mean that 'b' leg (up) has completed, and 'c' leg (down) is about to begin downwards."
Losing 400 points or 2.3% for the week, Sensex broke the 0-b line on Friday. Realty and Bank Index proved losers, both shaving off over 5%. Pharma and IT were the only sectors which gained, up nearly 2%. Weekly candle formed on Sensex resembles a bearish Evening Star pattern.
With action at the end of "b" looking more like a Rounding Top, break of 0-b line provided 1st stage of confirmation that the downward "c" leg (of the a-b-c formation since 17th Oct high of 17493) has commenced as feared.
Trading below last week's low of 16693, would test the next crucial level at 16650, which corrects the post-16210 rally by 61.8%. It can be temporarily positive if Sensex holds this 61.8% level.
For the last five days, none of previous day's high could cross. Until any previous day's high is taken out, bias would continue negative, perhaps trading the Red falling channel shown on the charts. Our parameter for any positive scenario would not only require taking out previous day's high, but also a decisive break above this Red falling channel.
Structurally, it was assumed that we may be into "c" of the a-b-c pattern from 17493.
As was mentioned, "if the bearish option of downward 'c' (beginning this Friday) confirms, it could open violent downsides, just like the 'a' wave (which was the violent 10-day drop post-17493) … As 'a' leg came down by 2160 points (12%) in 10 days @ 216 Points Per Day (PPD), "c" should come down at a similar rate … "
Currently, the "c" leg is going @132 PPD, and therefore, needs to accelerate, in order to match the characteristics of "a". Similarity of characteristics between "a" and "c" of any a-b-c pattern, is a usual observation. Lack of acceleration from hereon could be considered a factor against our bearish assumptions, even before the bias turns positive.
Perhaps only such an acceleration would be able to break through the Dubai bottom of 16210, which had proved a strong bouncing point earlier. Lack of immediate acceleration could also mean "b" is still forming as a Triangle, and the 5-day fall is only its d.
It was also pointed out that "since 'a' and 'b' are almost equal price-wise, the a-b-c structure (from 17493) can form as an Elongated Flat, with a much bigger 'c' leg, which could look like what happened during 'Jan to 'May in '2004."
In Elongated Flats, "b" achieves equality with "a", but takes a longer time to do that. This results into a big disappointment for the bulls who, despite the apparent treacherous progress of "b", thought "this time it would be different, i.e. bullish".
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 respect to this argument, Dollar Index chart was shown. I said, "While one cannot argue with the liquidity in the short term, we cannot ignore the risks if it chickens out. This risk factor will get highlighted next week, if the Dollar continues to move higher."
The Dollar Index has had inverse relationship with Sensex. While Dollar Index' rally till Mar'09 matched with Sensex' fall from 21206 to 8047, its drop from Mar'09 onwards matched with Sensex' rally from 8047 to 17500.
I had argued that "While Dollar Index has seen a long bear phase, its short term bounce has been indicated by Weekly MACD turning positive. A further strong move, if seen, will pose a threat to the Sensex sustaining at higher levels. Remember, strength in Dollar Index can even result in FII withdrawing from our market, especially flows which came in as Dollar carry trade."
The week saw Dollar Index moving up by 1.6%. A collateral damage of 2.3% was seen on Sensex, exactly as argued.
On the Weekly chart given below, alternative structures were shown, wherein a-b-c structure completed at 17500 as a Truncated Zigzag (with "c" measuring less than 38.2% of "a").
Bullish Diametric structure was mentioned as a distant possibility and a bullish alternative, especially 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.
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.
[Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify the new arguments given in regular font]
After showing falling volumes since 18th May, On Balance Volume (OBV) chart had shown a positive break above the Yellow resistance line.
However, it now appears moving in a band for the last five weeks, shown in Violet color, break of which would provide further clues.
Sensex has seen supportive activity whenever OBV touches the lower band. Last week the range shown in Violet color was broken on downside, indicating volumes increasing on drops.
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 22.21.
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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