| Weekly Technical Analysis | 
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| | | June 14, 2010 | | - By Vivek Patil, India's foremost expert in Elliot Wave Analysis | | · Sensex trades ranged inside previous week's high-low. · IIP surpasses all predictions, grows 17.6% in April, a 20-year high. · Gold hits a new record high of Rs.19240 / $1250. · Infotel Broadband wins most circles in BWA auction, gets taken over by Reliance. · SEBI goes slow on giving license to foreign funds' investment vehicles. · Bhopal verdict disappoints victims. · EGoM differs decision on petro prices. · Anil Ambani withdraws defamation suit against Mukesh Ambani. | | Extracting assumption rejects above 17300, "i" possible instead |
Last week it was contended that, “weekly action formed into a Stalled pattern due to its smaller size compared to previous week. Follow-up above or below its high-low, at 17150 and 16318, would decide the next direction … With weak Global cues over the weekend, Sensex’ survival above 17K may turn out to be a challenge … Failure to sustain above 17K level would maintain negative options.”
Global cues over the last weekend generated a gap-down open on Monday. Down by about 550 pts, Index touched a low of 16560 by Tuesday. The low, however, kept higher than previous week’s bottom (16318), which was mentioned as crucial. As a result, Index recovered during the remaining days, but its high of 17131 missed previous week’s high of 17150 just by 20 points. Overall, the action ranged inside previous week’s high-low, both of which were mentioned as deciders.
While Sensex closed flat for the week, Auto and Healthcare Indexes gained about 1.5% each. Net losses were seen in Realty (-4%), IT (-2.5%) and Metals (-2.4%) Indexes. A/D ratio was negative 1:3.
The monthly candle for the month of ‘May’10 was Evening Doji Star pattern. Its bearish implications can be cancelled only above its head at 17537.
Structurally, we were assuming the current rally post-15960 to be the “b” leg of 2nd corrective, which I had argued, should correct more than 61.8% of “a”, which it did.
Since smaller ‘b’ of “b” corrected only about 40 to 50% of the initial rally, the development post-15960 was considered a probable “Extracting Triangle”. A small ‘b’ is symptomatic of Extracting Triangle.
An “Extracting Triangle” is a 5-legged pattern with directional legs getting smaller and non-directional legs getting bigger. The “c” leg was smaller than “a” (just as about 61.8% of “a”). The Extraction confirmed, as argued last week, when “d” turned out to be a bigger fall than “b”.
Any further positive scenario, particularly challenging this theory of “extraction”, would need the Sensex to hold Friday’s gap-up, and follow it up by sustaining above 17150-274 (or say 61.8% retracement to fall at 17300). Such a move makes the 3rd rally bigger than the 2nd, which in effect breaks the “extraction” logic. Extracting Triangle should show c < a and e < c directionally, and d > b non-directionally.
We can allow Sensex up to three more days to deal with the crucial upside mentioned as 17300, in terms of faster retracement to last week’s fall.
While bearish confirmation (close below Friday’s gap or 16900) confirms larger structure since Mar’09 lows as a 7-legged Diametric, bullish confirmation (above 17300) would weigh in favor of 9-legged Symmetric, “wherein Apr-May fall would be its ‘h’ leg, and rally thereafter is its ‘I’ leg”. The “i” leg, if confirms, will have potential to match but remain smaller than “g” leg, as all other previous rallies did.
For us, market has been developing as per some exact price-time ratios since Mar’09. Each subsequent rising leg was smaller than the previous rising leg, and consumed about 10 weeks. Similarly, each falling leg was smaller than its previous falling leg, and consumed about 5 weeks.
This rhythm breaks below 15900 or above 18400. Beyond these levels, directional bull/bear call can be taken.
Sensex is trading closer to its 200-day EMA, which is technically considered crucial decider between BULL and BEAR market.
The “b” of 2nd represents supportive activity to hold the crucial 15900/15651 marks (lower end of the 7-month long channel since Oct’09). More bearish options open when these areas get broken.
By holding 15960, Sensex has been protected from the bearish options for the time being. “we’ll see how much bulls can bank upon this support”.
As marked on the Daily chart, we are initially assuming a Complex Corrective structure for the fall which began at 17975 on 15th Apr. The 1st corrective was an Elongated Flat. The “x” formed as a Zigzag (alternating with the 1st corrective as required), and gave a false break of the channel. However, it was less than 61.8% of the 1st corrective (small “x” waves should not correct more than that). The “a” of 2nd dropped below the low achieved by the 1st (16684), just as I contended for. Remember, Complex Correctives involving an “x” usually channel well.
As I have been stating, “A drop measuring 2100 to 2400 points over 3 to 5 weeks has been a normal phenomenon since Mar’09 lows.”
Based on this phenomenon, we had projected 16K levels for Sensex within 3 to 5 weeks. Sensex lost 2088 points in 7 weeks, achieving that projection.
Time-wise, this drop has already turned abnormal (by continuing beyond the usual 3-5 weeks). A drop below 15900 would be required to make it unusual even price-wise.
From the ‘Apr high of 18048, dropping below 15900 would mean the largest drop since Mar’09 lows. Such a move, as I noted earlier, would also break the 6-month long channel shown on the initial Daily chart.
Drop below 15900 continuing for over 5 weeks, would, therefore, be considered 1st stage confirmation that 13-month long larger “B” ended in Apr’10 high near 18K, as a Diametric formation, and larger “C” has opened downwards.
The 2nd stage of confirmation (that the larger “C” has opened) requires Index to drop below 15651 in faster time. Keen wave followers may not miss the fact that the bottom of “f” (which ended at a higher low at 16167 on 25th Feb’10, with H&S formation) has already been broken. under Neo-wave Theory, a structure in opposite direction usually begins with a faster retracement of the last segment of the previous structure.
As far as Sensex development since Mar’09 is concerned, the legs of the Diametric have shown reduction in magnitudes in both directions. Thus, within directional legs, “g” was lesser than “e”, “e” was lesser than < “c” and “c” was lesser than “a”. Within non-directional legs, “f” lesser than “d” and “d” was lesser than “b”, as shown on the chart below.
On this chart, one may also observe that since ‘2008, the directional legs continue for about 10 weeks, and non-directional legs consume an average of about 4 or 7 weeks.
Inside the larger “A” from Jan’08 to Mar’10, which was a 14-month affair, direction was downwards. All the legs in downward direction consumed about 10 weeks.
Inside the larger “B” from Mar09 to Apr’10, which was also a 14-month affair, direction was upwards, and all the legs in upward direction consumed about 10 weeks.
[Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify the new arguments given in regular font]
Once the drop from Apr’10 highs confirms as a larger “C”, the same may also turn out to be a 14-month affair, though it may also end in 8 months, which is a 61.8% ratio to 14.
However, once this fall confirms as the larger “C”, we could see a new downward series of 10-week down and 4-7 week up.
As I have been mentioning, “The implications of “g” finishing off at levels lower than 18400 would bring in the implications of 2-year cycle, described elsewhere in this Report.
Going by my old arguments since Jun’09 : (1) the PE ratio is touching maturity level under normal conditions of the market (2) Sensex has doubled from its bottom levels (3) the main buying force, i.e. FII investment, has been generating reducing returns (4) Daily Oscillators are on –ve Divergence (5) Weekly Oscillators are in negative mode.
These arguments have ensured that whatever euphoria we saw in the market was limited only to select individual stocks. Sensex itself has been oscillating around 15500-18000 levels for the last ten months since Jun’09.
As can be seen on the Monthly chart of Sensex given below, the current also rally had a questionable base-line. All the previous rallies on Sensex maintained the base-line, break below which led to a sizable price-time correction. The ‘2009 rally, therefore, turns out to be unique in nature, somehow holding higher so far.
Going by historical examples of base-lines, I had pointed out that “benefit of doubt may be extended till the 3rd change in the base-line, holding which, Sensex could still move higher towards 22000 levels (as “b” becomes part of a Diametric instead of Triangle, as explained elsewhere).”
The Sensex, however, has broken the 3rd baseline which was valued at 17K for May’10. It would, therefore, face the danger of dropping to the 4th line at the least, but may also fall to much lower once we have the 1st and 2nd stage confirmations listed above.
Break below 3rd such base-line, is already signaling the end of the larger “B” leg (beginning Mar’09). We may, however, watch for 1st stage (15900) and 2nd stage (15651) confirmations before judging a bigger drop.
Example of the rule of “3” is shown on the Monthly chart of Dow below.
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.
As I have been saying, “Will the history repeat itself ? Whether this happens or not, we need to be cautious on this front.” We are now watching if the range-bound coiling development out of the box leads to an uncoiling into a big fall, as it did during ‘2004.
The 1st quarter of every 2nd year has proved a turning point on Sensex’. Beginning Jan’1980, most of the turning points can be seen occurring during Jan-Mar period of an even year, as marked on the chart.
We are now near the 1st quarter of ‘2010, which is an even year, therefore, at a turning point as per this 2-year cycle.
Although not strictly in the 1st quarter of ‘2010, market had begun reacting from Apr’10. Under time analysis, certain tolerance is allowable.
After showing falling volumes since 18th May, On Balance Volume (OBV) chart had shown a positive break above the Yellow resistance line.
OBV held the Green line shown. On the upside, the Red appeared crucial, and the Index is currently maintaining below that line.
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 last weekend, the PE ratio improved marginally to 23.03 (against 23.78 last week).
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 current rally appears stalling near the breakdown level at 17200.
Alternative 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
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. The Sensex is now forming its internal 5th Wave, which 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”). Its internal 3rd was an “extended” leg, which achieved exactly 261.8% ratio to the 1st on log scale.
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.
As per my second alternative, a Super-Cycle-Degree 3rd or 5th began since Nov’84. The Sensex is now forming its internal 5th Wave, which 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”). Its internal 3rd was an “extended” leg, which achieved exactly 261.8% ratio to the 1st on log scale.
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 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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The Diametric development from 2003 to 2008 has been considered as the 1st of the 5th. Due to corrective structure in the 1st leg, larger 5th could be developing as a Terminal. We are into its 2nd wave, since ‘2008, which would consume 8 to 13 years.
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 labeling shows 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 5th proves to be a Terminal, the 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.
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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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