31/01/2014
Weekly Technical Analysis
27 Jan 2014
- By Vivek Patil, India's foremost expert in Elliot Wave Analysis
Top Stories of the Week
Sensex' tanks after a smaller rally, prunes down net gain for the week.
After New Delhi, Maharashtra Govt cuts power tariffs by 20%.
Delhi Power dicoms move High Court against audit by CAG.
RBI phases out bank notes printed before '2005.
Urjit Patel committee estimates high level of inflation for one more year.
Sensex tops on Thursday, tanks on Friday after a smaller and slower rally
[Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify the new arguments which are written in regular font]
Last week we discussed, “the development since Aug’13 still continues to shows ‘contraction’. At the fag end of such contraction, trading would not be easy … we can assume that f-leg completed as a Flat on 10th Jan’13, and g-leg opened thereafter. The 4-day rally of last week could be a part inside the g-leg, and Friday’s move looks as beginning of its internal b … g-leg would be the last upward leg, which could achieve magnitude equivalent to the e-leg to indicate ‘expansion’ in the latter part of the Diametric … if the g-leg fails to turn bigger than e-leg, the pattern from Aug’13 may end as a Triangle, with its e-leg comprising an ‘Ending Triangle’ … When the Index starts to strengthen and close above previous day, +ve possibilities could open … ”
Sensex formed a Bull candle on the very first day. Strength and close above Monday’s high on Tuesday opened +ve possibilities as argued. However, up 346 pts by Thursday, Index turned around on Friday, and pruned down the net gain for the week to a mere 70 pts or 0.33%. While IT/Bank/CD Indexes ended +ve, all other sectors ended -ve. The Realty/Power Indexes were hit the maximum, and lost over 1% each.
The Sensex turned lower after a marginal break of upper end of the Yellow Channel shown on the 30-minute chart. The reaction of Friday suggested Index’s inability to break its 3-month long resistance area.
Last week’s rally measured 409 pts in 51 plots on 30-minute chart. The preceding rally had measured 754 pts in a similar time. Last week’s rally, therefore, remained slower and smaller once again.
Index has reacted several times from 21100+ area in the last three months. However, every such reaction generated “smaller” drop compared to preceding one so far. The question, therefore, is whether and when will the reaction turns itself bigger than the previous reaction.
The marginal break above the Yellow Channel looked like a breakout, but it only proved as “Sucker Rally” once again, as we have been arguing since Nov’13.
Structurally, until that a bigger reaction is seen, Index remains in “Contraction” mode, as consecutive rallies also have gotten smaller. As was argued, “At the fag end of contraction, trading would not be easy”.
For the 2nd consecutive week, Index topped on Thursday, and tanked on Friday. In these two weeks, Index had recovered from Monday onwards. Today, which is Monday again, we may watch if a similar action takes place, because there is RBI policy on Tuesday this week.
Friday’s action closed below lows of last 3 bull candles in one go. The broader market was out-performing Sensex/Nifty lately. On Friday, the BSE Small-Cap Index closed below its lows of last 3 weeks and Mid-Cap Index closed below lows of last 4 weeks.
Structurally, we considered the development from Aug’13 onwards as a 7-legged Diametric. We opened its g-leg, the last upward leg of the pattern from 10th Jan’14 low of 20625 (Nifty 6139).
The rally till 16th Jan was considered a of g-leg, and the development thereafter was suspected to be b of g-leg.
If the current reaction stops near about 21K levels, which is marked on the chart, we could consider it to be the last leg of the Flat inside b of g-leg. An upward c of g-leg is still pending.
However, due the slower nature of last week’s rally, we suspect an alter possibility that that Index could be forming an Extracting Triangle inside g-leg.
Extracting Triangle is a 5-legged pattern showing smaller rallies (c < a) and bigger fall (d > b). This alternate possibility confirm when Sensex drops below 21K, thus turning d bigger than b.
We may, therefore, watch around 21K levels as crucial structural decider. As can be seen on the charts, 21K levels also appeared as support area during the last two weeks.
Break below 21K (Nifty 6234-43) in the next 2 days would mean “faster retracement” of last week’s rally. This, followed by faster retracement of g-leg, i.e. drop below 20625 (Nifty 6139) could raise possibility of g-leg (of larger Diametric we assumed from Aug’13 onwards) ending as a “Failure”.
As per NEoWave logics, major top formations involve structures ending at a “Failure” point. This we cannot rule out because Index is already on the Jan-Topping Cycle, based on which, we identified top for the Index last year during Jan’13.
Here is another time-cycle based on the Monthly Closing Chart of Sensex. This “36-month Monthly Close Cycle” shows Index topping in Dec every 3 years or 36 months, as marked on the chart below. On the Monthly Close chart, Sensex showed M-Shaped top during ‘2007 and ‘2010, and could have formed it again during ‘2013.
The M-Shaped top confirms if Sensex closes below Nov’13 close of 20791 at the end of the current month, which is now only a week away.
The chart shows the M-Shaped tops with highest closing exactly 36 months away during Dec’07, Dec’10 and Dec’13. It also mentioned the value of Monthly Close of each relative November. January closing below November’s close would confirm the M-Shape.
In the last week of January, therefore, close on 31st Jan may be watched. Major top as per this cycle is very much likely if close of 31st Jan happens to be below 20791 (Nifty 6176)
Within the “Contracting” structure since Aug’13, the moves in upward direction got smaller, and the moves in downward direction also got smaller. Remember, by VP’s Structural logics, here we compare rally to rally and fall to fall.
We found that since Aug’13, each rally, except the one which ended last Friday, was exactly 61.8% of its preceding rally. Similarly, each fall was found to be exactly 80% of its preceding fall.
We, accordingly, continue assuming development from Aug’13 as a 7-legged Diametric. The “contracting” part of this Diametric continued till f-leg, and Sensex is currently forming its g-leg.
The g-leg would be the last upward leg of the pattern, which could achieve magnitude equivalent to the e-leg to indicate “expansion” in the latter part of the Diametric. This would require Sensex to move higher than 22000 (Nifty higher than 6600) on the upside.
However, if the g-leg fails to turn bigger than e-leg, the pattern from Aug’13 may end as a 5-legged Triangle, (instead of 7-legged Diametric), with its e-leg comprising an “Ending Triangle”, as shown on the chart below.
Within this Triangle, c-leg was exactly 61.8% of a-leg, and the current e-leg (from 22nd Nov’13 onwards) is 61.8% of c-leg, at least so far.
The alternative Triangle assumed from Aug’13, shown above, confirms on faster retracement of last leg, i.e. e-leg of both, the Ending Triangle as well as the larger Triangle. In other words, faster drop below 10th Jan’14 low of 20625 (Nifty 6140) and 22nd Nov’13 low of 20138 (Nifty 5973) would confirm this assumption.
Overall, we need to see a bigger rally or bigger drop, i.e. break from “contraction”, to indicate something meaningful structurally. Until then, all the up-moves would look like just another Sucker Rally, and all the drops would only raise false alarms.
After hitting the high last year during Jan’13 (as per our “Jan-Top Cycle), we have seen Sensex making several attempts to break above ‘2008-10 highs. However, it has reacted lower every time it did that.
We had argued that such attempts would prove as “Sucker Rally” to entice the last buyer for investing into the market. This was suspected because we believed a long term consolidation phase beginning ‘2008 is still on.
Prior to ‘2008, Sensex had multiplied 7 times from its ‘2003 lows. We argued, such multi-fold rally could results into a multi-year consolidation phase. Inside such a phase, new high does not open a bull phase.
As we noted, after 11-fold rally during ‘1988 to ‘1992, Sensex consolidated for 11 years till ‘2003 (161.8% time ratio). Within this consolidation, Sensex corrected as much as 30-60% every time it touched a new high.
Currently, Sensex is once again right in to the “Jan-Top Cycle” as shown below.
As was mentioned, in the last 14 years since ‘2000, Sensex formed a top during ‘January of the year in 7 out of 14 cases. In 4 cases, the top was formed during ‘February, and in 2 cases, it was formed during ‘March.
Thus, except during ‘2006, all significant tops were formed during the 1st quarter of each year ever since ‘2000. This phenomenon may also be seen as “NAV Pop-Up Exercise” by fund managers at the end of each Calendar Year.
Further, Sensex has completed 105 weeks from the last major bottom of Dec’11. This achieves “time-equality” with preceding major up-move from Oct’08 to Nov’10. However, “price-wise”, the current up-move achieved only 47% in comparison to previous up-move.
In terms of Quarterly, we are comparing how the up-move of last 8 quarters performed in relation to the previous 8-quarter up-move of Oct’08-Nov’10, which also consumed 8 quarters.
Structurally, the up-move of last 8 quarters is, thus, clearly “slower”.
During 8 quarters from Oct’08 to Nov’10, FIIs invested Rs. 215000 crs as per SEBI data. In the current 8-quarter up-move post Dec’11, FIIs invested Rs.242000 crs. Thus, post Dec’11 up-move has so far remained smaller despite the larger investment from FIIs.
As for DIIs, SEBI data shows divestment of Rs. 32400 crs during Oct’08-Nov’10, and of Rs. 43800 crs after Dec’11. Thus, the up-move of last 8 quarters remained smaller despite the higher FII investment, and larger divestment from DIIs.
The sluggish up-move of last 8 quarters does not give any sense of “breakout” action, at least not so far. For it to generate a sense of breakout, the minimum that we would be looking out for could be “faster retracement” of a falling segment.
Until that actually happens, it would only result in tricky, boring, tiring environment for the players.
Coming to wave-structure, after we observed rallies getting smaller since Aug’13 (e < c < a), we suspected the development could be forming into a 7-legged Diametric. It was explained that a Diametric, Bow-Tie variety, should ideally show “contraction” up to d-leg, and “expansion” thereafter.
On one higher degree, diametric from Aug’13 would make up F of the larger Diametric from the year ‘2008, as shown on the Monthly chart above.
We had decided to consider bullish structural possibilities, i.e. this rally being either F leg OR breakout from Triangle, only when we see the action strengthening further and holding above ‘2008-10 highs of about 21100-200.
It was argued that 7-fold rally from ‘2003 to ‘2008 would require a multi-year consolidation to digest the excesses created by such a rally. As was argued, if the multi-year consolidation achieves 161.8% time ratio to the rally, it could end on or after after ‘2015.
However, by NEoWave, the consolidation phase has to consume a time greater than the rally. Against the 56-month rally from May’2003 to Jan’2008, Sensex has already completed 67 months consolidating from Jan’2008 to Aug’2013.
Having seen this, we also raised the question if the consolidation from ‘2008 onwards is now completed as a 5-legged Triangle (instead of 7-legged Diametric), as shown on the chart below :
On the super-cycle degree, we considered a “Terminal” development since ‘2003 onwards. The Terminal was suspected because its 1st wave from 2003-2008 had a “corrective” label. (In a normal Impulse, 1st wave should have “Impulsive” structure).
The 2003-2008 rally was internally marked as a corrective pattern called a Running Diametric.
Also, more importantly, its only inside a Terminal, that 2nd wave can be Triangle. (as against this, in a normal Impulse, 2nd wave cannot develop as a Triangle, only 4th can).
Under the circumstances, if the Sensex now holds and indeed strengthens above its ‘2008-10 highs, we will be forced to consider the current up-move as the 3rd of the Terminal Impulse, as per the Green labels shown below :
An ideal “suckers rally” usually involves making a New High. As we can be seen on the chart below, Sensex moved higher than its ‘1992 highs during ‘1994 and ‘1997, but reacted by over 30% both the times.
Later during ‘2000, it broke 1992/1994/1997 highs, by as much as 1500-1600, only to lose 58% later. After a severe corrective phase lasting from ‘2000 to ‘2003, Index broke ‘2000 high during ‘2004 by 100 pts, but even then shaved off 30% before the next rally could take place.
All this happened because the 11-year long ‘1992-2003 phase was a multi-year corrective phase was correcting the preceding 11-fold rally from ‘1988 to ‘1992.
We had argued that multi-fold rallies require multi-year consolidation phases to absorb the excesses during the multi-fold rallies.
Since the Sensex multiplied 7 times during ‘2003 to ‘2008, we argued it could require a multi-year consolidation again, probably lasting 7 years from ‘2008, and such a consolidation would, accordingly, end only after ‘2015.
The basic NEoWave requirement is that such a corrective phase should consume more time than the move it is correcting. The ‘1992-2003 corrective phase continued for a time-ratio of 261.8% to the preceding 4-year rally from ‘1988 to ‘1992.
As per Wave Theory, a corrective phase shapes up as 3-legged Flat/Zigzag, 5-legged Triangle or 7-legged Diametric (which basically combines 2 Triangles).
The current phase from ‘2008 onwards is correcting the 56-month move from May’2003 to Jan’2008. It already has continued for 69 months from Jan’2008 till now, i.e. more time than the move it is correcting.
The question now is whether the corrective phase would end as a 5-legged Triangle, OR would it continue for 2 more legs and form as 7-legged Diametric.
As was shown on the chart above, all the up-down legs from Jan’13 to Aug’13, except “b”, consumed exactly 20-25 days
As per VP’s observational rules, all the legs, except “b”, of a 7-legged Diametric tend towards time-similarity. Indeed, by reverse logic, when legs begin to be similar in time, the structure is more likely to form as a Diametric.
On one higher degree, we also observed time-similarity from ‘2008. All the legs, except “b”, consumed about 13 months since the year ‘2008.
As was shown on the chart below, the fall from Jan’08 to Mar’09 was 13 months, and the same was labeled A of a large 7-legged Diametric formation. The B leg from Mar’09 to Nov’10 consumed 20 months. As argued, B leg can different time-wise.
The C leg (from Nov’10 to Dec’11) as well as D leg (from Dec’11 to Jan’13) maintained the time similarity, each consuming 13 months exactly. Under the circumstances, it was thought fit that the larger formation from ‘2008 onwards to be a 7-legged Diametric formation.
This long-term picture was published on 6th Feb’12. The Diametric assumption also compared well with the 11-year formation previously seen during ‘1992 to ‘2003.
The question, now, remains if we continue with the Diametric assumption or complete the post-‘2008 development as a 5-legged Triangle. As we have been explaining, we can open possibility of ending the phase as Triangle only if we see strength above ‘2008 high of 21207 (Nifty 6357).
The market is being moved mainly on a/c of FII buying heavyweights selectively, even as many stocks have been trading near previous lows in the broader market.
Despite FII buying in the last five years since ‘2008, the Sensex has not been able to cross its ‘2008 high so far.
How reliable is the FII Net Investment data coming from SEBI is another question. We generally see the inflated figure in FII buying matching with DII’s selling figure. However, above observation is made assuming the data from SEBI is correct.
The disparity between Sensex and broader market was shown on the comparative chart below :
While the Small-Cap Index broke below its Dec’11 lows, and is now attempting to recover above the same, the Sensex itself is found testing at the upper end of the channel shown on the following chart :
This year, Sensex has made several attempts to break the upper end of the channel shown above, but each time it reacted lower. Last week’s reaction has come through exactly from the upper end of this channel.
The larger structural +ve scenario can open only if the Index breaks / sustains above this channel. If we continue the argument for multi-year consolidation phase, as explained previously, such a move could mean larger E ended in 8 months and F is opening.
It was argued that after a 7-fold rally from ‘2003 to 2008, Index may form a 7-year long consolidation phase from ‘2008 onwards, which could end only after ‘2015, which would achieve 161.8% time ratio with ‘2003-2008 rally.
To consume the required large amount of time, we thought a 7-legged Diametric formation would fit the bill, just like it did during ‘1992-2003.
If each leg of the Diametric consumes about 13 months, and so far all legs (except B) since ‘2008 did consume 13 months, it would amount to 7-year+ as consolidation phase.
Not related to Wave Labels so much on an immediate basis, the 30% principle shows that Sensex is at a risk of 25-30% cut every 2-3 years, ever since ‘2004, i.e. in the last 9-10 years.
In this period, the 25-30% cut was seen from the tops in May’2004, May’2006, Jan’2008 and Nov’10 so far. The last bottom was during Dec’11. Sensex has now completed 22 months since then without a 25-30% cut.
Even in case the Sensex opens +ve options in the short term as discussed, we should keep the 30% principle in the back of the mind, and act as required when the time comes.
As shown on the chart comparing Sensex with broader indices, one could see a 30%+ cut on the broader indices during ‘2013. Such cut is pending on the Sensex chart.
With the help of different heavyweights, Sensex has been attempting to take out ‘2008 highs for the last five years, but failed every time. Even during the current year, three such attempts were made, mainly with the help of ITC, but Index failed.
Despite all that, the broader market has kept itself suppressed. Indeed, BSE Small-Cap and Mid-Cap Index both shaved off over 30% during ‘2013. Further many investors’ stocks touched ‘2008 lows or even lower levels. Some of the favorite stocks from PSU / Infrastructure virtually turned into penny stocks.
Under the circumstances, the market does not appear running away. The long-term 7-8 year consolidation should continue in the broader market, if not on Sensex itself.
The recent supportive effort was seen protecting the Grid level near 17800 which was shown on the following chart. The upside Grid is at about 20250.
Since Jan’13, Sensex kept reacting lower from the Grid level at 20250, and later dropped to the lower Grid level at 17800. As we noted, VP’s 2450-point Grid System, thus, continues to provide important turning points since the year ‘2008.
Currently, Sensex is above 20250, and seen attempting to hold it.
On the Sensex chart, we had assumed that a major top was made during Jan’13 as per Jan-Topping Cycle. As it has been a totally polarized and selective market, the BSE Small and Mid-Cap Indexes shed over 30% each during ‘2013.
Indeed, this time the broader market has been leading the bearish sentiment even while Sensex was holding higher with the help of few heavyweights, mainly ITC.
While Sensex consists of 30 stocks, the BSE Small-cap universe comprises 459 and Mid-Cap 233 actively traded stocks. While Sensex universe mostly comprise institutional holdings, broader universe affects the small investor.
Multi-Year long Diametric Formation
It was argued that all multi-fold rallies would be followed by multi-year long consolidations. Sensex, remember, rose 11-fold during ‘1988 to ‘1992, but entered a 11-year consolidation thereafter.
Again, during ‘2003 to ‘2008 it multiplied 7 times. Drawing similarity, it could a 7-year consolidation starting ‘2008. Further, the consolidation, may shape up like a 7-legged Diametric, similar to the consolidation seen from ‘1992 to ‘2003.
The Diametric formation from ‘2008 is also suspected because each of its internal legs, except B, have consumed about 13 months so far. So, the E wave from Jan’13 could also continue for about 13 months, and end somewhere around Feb-Mar’14.
This long-term picture was fist published on 6th Feb’2012, with both D legs highlighted in Purple color rectangles. In the previous instance, the D leg during ‘1996-97 had retraced as much as 97% of its preceding C leg. In the current instance, D retraced 84% of C.
Long-term corrective phase on Dow’s chart from the year '2000 onwards also appears to be a probable 7-legged Diametric. Instead of “Bow-Tie Diametric” on Sensex, Dow’s Diametric is shaping up as “Diamond-Shaped Diametric”.
Jan-Mar Topping Cycle
During Dec’12, it was pointed out that major tops occurred during Jan-Mar period in the last 13 years.
More than half the times, the top also occurred during the month of ‘January. Based on this, it was argued that Sensex could hit a major top during Jan’13, and it did. Substantial damage was, however, seen mainly in the broader market.
This cycle may be the result of NAV pop-up exercise in the last month of the Calendar Year. Jan’13 was the 7th such top forming in the month of ‘Jan.
Performance of the Broader Market
The broader market has, generally, under-performed the main Index since the year ‘2008, as can be checked on the chart below.
Indeed, the broader Mid-Cap and Small-Cap Indices have also broken 0-b lines (Red color lines) of the upward D leg. The Small-cap Index even broke its Jun’12 levels, and gave a faster retracement to the “c” part of post-Dec’11 rally.
Indeed, while the Sensex itself retraced 89% of it preceding 13-month fall from Nov’10 to Dec’11, BSE Small-Cap Index retraced only 38.2%, and has, in fact, reacted heavily from this retracement level.
The divergence between Sensex and broader market appears to be Index management activity, as the Sensex is held by the Index heavy-weights, while the broader shows distribution. This whole thing, however, made for a tricky and uncomfortable trading environment.
NEoWave Discussions
Inside the D leg from Dec’11 to Jan’13, we had had assumed a 3-legged a-b-c Flat. The “c” part was a 5-legged Impulse, inside which, 5th leg (beginning Nov’12) was assumed to be a Terminal.
Based on NEoWave requirements, it was argued that Sensex would drop below Nov’12 lows in 50% time of the 48-day long Terminal. Index eventually did drop below Nov’12, but took 48 day or 100% time (instead of 50%).
As an abundant precaution, therefore, following alternate wave-structure was suggested for the D leg from Dec’11. D is now completing 161.8% time ratio to C.
In the alternate scenario, “c” ended at Oct’12 high, and it was equal to “a” leg. The “d” was the smallest segment, and “e” (i.e. post-Nov’12 rally) was a “Double Combination” which ended in Jan’13.
The post-Nov’12 rally is retraced by 100% on Sensex, but more than 100% on broader indices. The larger picture of Diametric from ‘2008 onwards is, therefore, considered probable.
That would mean 13-month long D-leg has ended at Jan’13 highs, and 13-month long E-leg started thereafter.
NEoWave, remember, allows exceptions to rules at important market turning points or under “unusual” conditions, like end of larger patterns or last wave, such as a Terminal.
Also, Triangles and Terminals are exceptions to virtually all rules. Since Diametric pattern is made up of Triangles, NEoWave “Exception Rule” is also applicable to these patterns.
Since we were at an important turning point in Jan’13, and dealing with Terminal and legs of Diametric, perhaps pattern implication rules could not be satisfied to the full extent.
Does it really matter whether the Sensex achieves the pattern implication accurately within the time-price parameters, when the general direction of the secular market has been largely -ve as we suspected since Dec’12 ?
As we argued, the larger bear phase is already visible in the broader market. Since ‘Dec’12 we turned cautious as the rallies were getting smaller (shaping into a Terminal), and also because of the ‘Jan-topping cycle (discussed separately).
Terminal we assumed from Nov’12 to Jan’13, is a special kind of Impulse which occurs in the last wave position, i.e. either as “c” of Flat/Zigzag or 5th of an Impulse. Its internal structure is made up as 3-3-3-3-3, instead of usual 5-3-5-3-5.
In other words, each leg of a Terminal would develop as a 3-legged or 5-legged “corrective” structure, like a Flat, Zigzag or Triangle. Also, 4th of Terminal must enter the area covered by the 2nd (Overlap Rule).
A line similar to the 2-4 line on Sensex can also be drawn on the broader indices, and the same has been broken (as discussed separately).
Sensex, consumed 59 weeks to retrace 84% of its preceding 13-month fall, which also was a 59-week affair, as shown on the chart below :
The rally, accordingly, was considered slower, corrective structure as per NEoWave, and not as part of any fresh rally.
The channel enclosing the a-b-c Flat inside the larger D leg from Dec’2011 onwards was shown on the chart below :
The 80% retracement level was considered and marked as a pattern implication for the 13-month long Double Combination move marked as C. Pattern implications, however, cannot be strictly enforced for the legs of Triangle and Diametric, which are exceptions to the general rules.
As per NEoWave, most channeled moves enclose a Complex Corrective structure involving “x” wave. Complex Corrective involving 2 correctives, joined by one “x” wave, is called a Double Combination, and carries a pattern implication of not more than about 80%.
Note that the C leg of Sensex, from Nov’10 to Dec’11, was a Double Combination, with two equal-sized correctives (see weekly chart given above), and therefore, carried a pattern implication of 80% retracement by the D leg.
Further, as depicted on the chart below, since Nov’10, it has been generally useful to consider 61.8% to 80% retracement area as crucial for terminating moves.
As per Wave Theory, Flat is a 3-legged corrective pattern marked as a-b-c, where “b” corrects more than 61.8% of “a”. It is also a 3-3-5 pattern where “a” and “b” carry corrective label of :3, and “c” is an impulse label of :5.
Around a Flat, we usually draw a line joining “0” and “b” (0-b line), and take a parallel from the “a” point. The “c” leg should normally end near such parallel. The channel indicates similarity of its 3 internal legs, reason why Flats are called Flats.
Inside “c” of D (beginning Jun’12) for Sensex, we were expecting a 5-legged Impulse, because Flat is a 3-3-5 structure.
As per NEoWave “Extension rule”, one of the directional leg inside an Impulse should get “extended”, i.e. achieve 161.8% ratio to the next largest leg.
Since 1st and 3rd were “normal”, we could have projected 5th wave Extension. However, such a move would project values slightly above the Nov’10 highs, which would jeopardize the larger assumption of “Bow-Tie” shaped Diametric from ‘2008 onwards.
We, therefore, preferred 5th of “c” not to achieve 161.8% ratio, but terminate below Nov’10 highs, from where a downward E would open. Since E begins the “expanding” phase of the Bow-Tie Diametric, it would break below Dec’11 lows.
The 1st and 3rd inside “c” of D continued for about 4-5 weeks each. We expected 5th to consume a similar time, and end somewhere in the month of Dec’12 or near to it.
As the beginning part of 5th shows violence on upside, we suspected 5th could develop internally as a 1st Extension Impulse or Terminal. Since a “Terminal” always occurs at major turning point, it would be able to generate the necessary downside power for the larger E leg.
In the 7-legged “Bow-Tie” shaped Diametric from ‘2008, one can see a reduction in magnitude from A leg to D leg. The D leg is the smallest segment of the Bow-Tie shaped Diametric.
The other half of this Diametric, i.e. E-F-G legs, should show expanding magnitudes, and therefore, E should become larger than the D leg. This can happen only when E breaks the bottom Dec’2011.
After breaking the 13-month long channeled C (from Nov’10 to Dec’11), we had suspected that development post Dec’11 has potential only 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 was not an Impulse. A Non-impulsive C leg could only be part of a larger Triangle or Diametric.
BSE Dollex-30 Index
Meanwhile, since the FII activity turned a prominent factor in the Indian stock market, we examined the development of BSE Dollex-30 Index.
This Index shows Dollar-Value of Sensex, and is currently 37% lower than the actual Rupee-Value of the Index.
Its high is currently testing the Red resistance line shown.
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 has not been touched so far, but should be remembered as a crucial level which matches with the huge gap-up action (refer to the Weekly chart discussing 32-week cycle) seen during the ‘2009.
32-Week time cycle
The development since Mar’09 has followed a 32-week time cycle, as shown on the chart below.
This was used for raising a possibility that an important low would be formed around 20th Aug’11. Sensex responded by hitting the bottom on 26th Aug.
This cycle had also raised the possibility of an upward/sideways phase that could survive for 32 weeks from Aug’11, and end either on 4th Feb’12 or 31st Mar’12, developing as a ranged movement like the Left Shoulder. The upward phase ended during Feb’12 as per this cycle.
Going by the structural possibilities from this cycle, it was suspected that Sensex could be forming an “e” leg of a possible Extracting Triangle, which would remain smaller than the “c” leg. The “e” leg did remain smaller as suspected.
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.
Above 18000, Right Shoulder became bigger that the Left Shoulder, which appeared rejecting the Head & shoulders or “Extracting Triangle” argument. However, the 32-week time cycle may remain valid as a cycle even from here.
The Sensex was seen testing the “Neckline” shown on the chart, which did prove crucial, as Sensex bounced several times from the Neckline.
Another idea would be to mark the entire development as a Diametric, instead of Extracting Triangle, and the same is now marked on the chart. These assumptions indicate an incomplete B, but confirms only on faster drop below the Neckline, which is still awaited.
Recent recovery happens to be exactly at 32-week cycle turning point.
30% Principle
All major tops are characterized by 30% drop from the top value. This is normal not only inside a bear phase, but is commonly seen even inside a bull phase too. 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 around 28% so far. However, on BSE Small-Cap and MidCap Index, the loss from ‘2010 high does measure more than 30%.
Overall, it was argued much earlier, that we would see a topping formation spread over 2-3 month period beginning ‘Oct’10. 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%, though Sensex itself shaved off only 28%.
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.
Index during ‘2013 reacted thrice from the Grid level at 20250. It is now seen protecting this Grid level .
The larger picture
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 that the 14-month fall from Jan’08 was a Triple Combination “A” leg of a large multi-year consolidation. The corrective phase beginning Mar’09 retraced about 99% 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 of “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 though we saw 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 due to absence of impulsive behavior in its internal 1st wave. The “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 our Super-Cycle Degree count, shown on ASA Long-Term chart under a separate paragraph, we’ve 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.
During ‘2008, we were sitting on this very important cycle, which therefore, threw up similar possibilities.
In the previous 8-year cycle top during ‘1992, 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.
We had, accordingly, targeted sub-10k levels for Sensex price-wise during ‘2008-09, 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 was 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 a larger corrective phase following this 8-year cycle.
Appendix : Super-Cycle-degree Wave-scenarios for Sensex
For Super-Cycle-Degree wave-scenario, consider following ASA Long-Term Index. This Index has been created by combining a very old Index compiled by a British advisor (from '1938 to '1945), with RBI Index ('1945 to '1969), F.E Index ('1969 to '1980) and Sensex (thereafter till date).
The wave-count presented shows that the market is into the lower-degree 5th of the SC-degree 3rd or 5th wave.
The detailed wave-count from ‘1984 onwards can be seen on the Monthly chart given below. The 2-4 line shown on the ASA long-term Chart above, and Monthly chart below, would determine if the post ‘1984 Impulse is a Super-cycle-degree 3rd or 5th.
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 the 5th Wave, and the same could develop as a ”Terminal”, because its lower-degree 1st wave from May’03 onwards developed as a Diametric (which is 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.
While the 4th is shown as a 3-legged a-b-c Flat on the monthly chart above. Alternatively, the 4th is shown as a 7-legged a-b-c-d-e-f-g Bow-Tie Diametric on the Monthly chart below. The chart below also shows 11-year parallel channel from Apr'1992 to May'2003. As shown, if one projects the width of this channel on upper side, such a projection gave 20000 as the “minimum” target. This forecast was achieved.
As mentioned above, the lower-degree 1st from May’2003 to Jan’2008 appears to be a Bow-Tie Diametric, 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.
The Diametric development from ‘2003 to ‘2008 is considered to be the 1st wave of the Impuse. Due to the corrective structure in the 1st leg, the higher-degree 5th could be developing as a Terminal. Since ‘2008, we are into its 2nd wave, which could continue to develop over a period of 7-8 years beginning ‘2008.
As per NEoWave, break of 2-4 line confirms a Terminal development, and If the 5th proves to be a Terminal, the Super-Cycle-degree label of 3rd will have to change to 5th, because only a 5th of a 3rd cannot be a Terminal. Only a 5th of the 5th can be a Terminal. The Super-Cycle-Degree marking for 1st and 2nd as shown on ASA long-term chart, would then change to 3rd and 4th respectively.
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.
