weekly technical analysis 28th oct 2013.docx

8/14/2019 Weekly Technical Analysis 28TH Oct 2013.docx

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Weekly Technical Analysis28 Oct 2013

- By Vivek Patil, India's foremost expert in Elliot Wave Analysis

Sensex loses 1%, forms potential Downward Bar Reversal on weekly chart. Sales of consumer goods slowed close to 10-year lows. CBI summons coal block allocations files from PMO. Onion prices surge to record high of Rs.90 per kg. CBI registers 8 preliminary enquiries in Radia tape case. Govt firms up Rs.14000 cr fund infusion plan for PSU banks. Broking industry stressed, almost 500 stock brokers shut shop this year.

Top Stories of the Week

'Oct rally does 50% in 100% time, watch last week's Low as crucial

[Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify thenew arguments which are written in regularfont]

Last week we discussed, Compared to the preceding Aug-Sep rally, the current rally appears slowerthis may open a possibility that the development post Aug13 is an Extracting Triangle, a 5-leggedpattern with rallies getting smaller and drops bigger. The current rally (from 1

stOct), being slower, could

be c-leginside this development, as per labels marked in White We may, accordingly, trade with +ve bias,but watch if the rally gradually fizzles out in the next 4 days, and breaks its Grey channel enclosure after the last buyer gets sucked into, the market is more likely to correct "

The Sensex cautiously pushed higher in the first 4 days of the week. Up by 156 pts on Thursdaymorning, however, it wiped off all the gains by Friday, and closed 200 pts or about a percent lowerforthe week. The rally was seen fizzling out in exactly 4 days as we suspected . While Realty/ FMCG Indexes

lost about 2% each, the Capital Goods Index jumped a hefty 5.4% higher. The broader indices like Small-Capand Mid-Cap outperformed Sensex, and closed a percent higher.


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The action broke the original Grey rising channel , and new channels could be drawn only at lower angle ofascent.

The Weekly candle on Sensex formed as the first Bear candle after three consecutive Bull candlesin a row.With Higher High but a Lower Close, the action also formed what is technically known as a WeeklyDownward Bar Reversal (DBR).

Just to note, Sensex formed such a Weekly DBR patterns at all the tops so far during 2013 . Though it is abearish pattern, its -ve implications confirm only if the next Weeks candle weakens and also closesbelow its Low, i.e. below 20589 (Nifty 6116).

At the top of last week, Sensex touched 21039 level, as compared to its 2008 high of 21207 and 2010 high of21109. Indeed, last weeks high was exactly touching the resistance line joining 2008 and 2010 highson the Weekly/Monthly charts.

Unless the action from here takes out 2008 and 2010 highs, it can be said that technically Sensex is testinga crucial level, and therefore, needs to be watched more carefully from the perspective of a suckers rally.

As we observed since two weeks, the Oct rally has been slower compared to the preceding rally duringAug-Sep. Time-wise, both continued for 15 days, as it looks till now. However, the Oct rally could achieveonly 50% magnitude, as compared to the Aug-Sep rally.

Due to slower nature of the Oct rally, it was suspected to be a distribution move. Such a move isusually expected to be choppy, stock-sector specific.


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Such a slower rally is an indication that Bulls may be tiring out. Structurally, we suspected thedevelopment from Aug-13 onwards is an x, eitherdeveloping as a Complex Corrective comprisingtwo correctives OR alternatively developing as 5-legged Extracting Triangle.

An Extracting Triangle is a 5-legged pattern with rallies getting smaller and drops bigger. The Octrally, being slower, could be c-leginside this development, as per labels marked in White color on the initialDaily chart. Its yet not clear if the c-leg is over.

Extracting Triangle formation confirms if c-leg remains smaller than a-leg, and thereafter d-leg turnsbigger than the b-leg. The e-leg coming next would be its last leg, and faster downside retracement of thee-leg would confirm the end of the Extracting Triangle.

By conventional Technical Analysis, an Extracting Triangle would be seen as a Head & shoulders topreversal formation, with its Head at the top of c-leg, and Neckline near the bottoms of b and d legs.

An extracting triangle could also be seen as a distribution pattern . It shows bulls losing power graduallyas they are able to form only smaller rallies, andare confronted with bigger drops. [e < c < a and d > b].

All the internal drops inside the Oct rally measured exactly 375 -400 Sensex pts (110-125 Nifty pts). A

larger drop would indicate bears getting more powerful. The latest drop from Thursdays high of 21039 (6252) toFridays low of 20622, is already seen as a drop bigger than 400 pts.

The Oct rally having completed a similar time as a-leg (Aug-Sep rally), i.e. 15 days, and having achieved only50% magnitude in comparison, well watch for further-ve confirmations to end the c-leg and open the d-leg downwards.

The larger question to ask would be if the last buyer has bought into. Top cannot form until he has. Inorder to suck in the last buyer, NEoWave does not rule out tricky trade, including a suckers rally, atthe top under its Exception Rule. We may watch out for that.

In the last three days, ever since the majority opinion expected Sensex to take out its previous 2008 -10highs, the A/D ratio has been -ve, suggesting profit-booking in individual stocks and sectors.

The rising Grey channel is broken, but a Lower Top Lower Bottom forming on the Daily Close-Only chart belowthe channel is still awaited as further -ve sign, which would indicate a falling structure as per Dow theory.

All in all, it appears that for the Settlements Expiry week beginning today, last weeks Low of 20589 (Nifty6116) could be considered as a crucial level to begin with. Holding it could maintain +ve options. The -ve options can open otherwise. Watch it on closing basis.

While +ve options would mean continuation of c-leg of Extracting Triangle, -ve options could indicate itsdownward d-leg. Whether x from Aug13 can be finally marked as a Complex Corrective OR ExtractingTriangle would depend on time-wise retracement of c-leg.

If the rally of last 15 days was c-leg of the 2nd

corrective, it would be retraced in faster time. However, if

it was c-leg of Extracting Triangle, its retracement can take a longer time. Further, d-leg of an ExtractingTriangle is usually the most complex development among its five legs.


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An ideal suckers rally usually involves making a New High.As we can be seen on the chart above, Sensexmoved 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 acorrective phase from 2000 to 2003, Index broke 2000 high by 100 pts, but even then shaved off 30% beforethe next rally could take place.

This happened because the 11-year long 1992-2003 phase was a multi-year corrective phase correcting thepreceding 11-fold rally from 1988 to 1992.

We had argued that mu lt i - fold ral l ies require mult i -year conso l idation phases to absor b the excesses

durin g the mult i - fold ral l ies.

Since the Sensex multiplied 7 times during 2003 to 2008, we argued it could require a multi-yearconsolidation, probably lasting 7 years from 2008, and such a consolidation would, accordingly, end

only after 2015.

The basic NEoWave requirement is that such a correct ive phase should co nsum e more t ime than the mov ei t is correct ing. 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 correctiv e phase sh apes up as 3-legged Flat/Zigzag, 5-legged Triangle or 7-leggedDiametric(which basically combines 2 Triangles).


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The current phase from 2008 onwards is correcting the 56-month move from May2003 to Jan2008. Ital ready has cont inued f or 69 monthsfrom Jan2008 till now, i.e. more time than the move it is correcting.

The quest ion now is wh ether the correct ive phase would end as a 5- legged Tr iangle, OR would i t

con tinue for 2 more legs and form as 7-legged Diametric.

At a minimum level, a move above 2008 highs would be required to justify and modify the correctivephase from 2008 onwards from 7- legged Diam etric to a 5-legged Triangle, where E ended at Aug13l ows.

By alternative thought process, it was suspected that the development from Jan13 to Aug13 was a 7-legged Diametricas was shown on the chart below.

As was shown on the chart, al l the up-down legs from Jan13 to Aug13, except b, consumed exactly 20-25 days

As per VPs observational rules, all the legs, except b, of a 7-legged Diametric tend tow ards time-simi lar i ty. Indeed, by reverse logic, when legs begin to be similar in time, the structure is more likely to form asa Diametric.

By the same logic, on one higher degree, we had observed all the legs, except b, consum ed about 13months since the year 2008.

As was shown on the chart below, the fall from Jan08 to Mar09 was 13 months, and the same was labeled A


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of a large 7-legged Diametric formation. The B leg from Mar09 to Nov10 consumed 20 months. As argued, Bleg can different time-wise.

The C leg (from Nov10 to Dec11) as well as D leg (from Dec11 to Jan13) maintained the time similarity, eachconsuming 13 months exactly. Under the circumstances, it was thought fit that the larger formation from 2008onwards to be a 7-legged Diametric formation.

This long-term picture was published on 6thFeb12. The Diametr ic assum pt ion also com pared wel l wi th 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- 2008development as a 5-legged Triangle. As we have been explaining, we can open pos sib i l i ty of ending thephase as Triangle only if we see strength above 2008 high of 21207 (Nifty 6357) .

Currently, therefore, we are toy ing wi th the idea that the up -move from Aug13 lows is either x wave

inside sti l l - form ing Com plex Corrective insid e E, OR its F leg of the Diametric (where E was the shortestleg instead of usual D).

The market is being m oved m ain ly o n a/c o f FII buying heavyweights select ively, even as many stockshave been trading near previous lows in the broader market.

Despit e FII Net additional I nvestment of Rs. 369901 crsin the last five years since 2008, the Sensex has notbeen able to cross its 2008 high so far.


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How reliable is the FII Net Investment data coming from SEBI is another question. We generally see theinflated figure in FII buying matching with DIIs selling figure. However, above observation is madeassuming 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 Dec11 lows, and is now attempting to recover above the same, theSensex i tse l f is found strug gl ing at the upper end o f the channel shown on the fo l lowing chart:


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This year, Sensex has m ade severa l at tempts to break the upper end of th e channel shown above, buteach time it reacted lower. In case +ve opt ions, Sensex m ay make another at tempt towards the upp erchannel, but the move could still be part of the x.

The larger struc tural +ve scenario can open only i f th e Index breaks / sustains abo ve this chann el. If wecontinue the argument for multi-year consolidation phase, as explained previously, such a move couldmean larger E ended in 8 months and F is opening.

It was argued th at after a 7-fold rally from 2003 to 2008, Index may form a 7-year long consol idat ionphase from 2008 onwards, which could end only after 2015, which would achieve 161.8% time ratiowith 2003-2008 rally.

To consume the requi red large amoun t of t im e, we thought a 7- legged Diametr ic form at ion would f i t 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 consume13 months, it would amount to 7-year+ as consolidation phase.

Not related to Wave Labels so much on an immediate basis, the 30% princ iple show s that Sensex is at arisk o f 25-30% cut every 2-3 years, ever since 2004, i.e. in the last 9 -10 years.


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In this period , the 25-30% cut was seen from the tops in May2004, May2006, Jan2008 and Nov10 sofar. The last bottom was during Dec11. Sensex has now completed 22 month s since then wi thout a 25-30% cut.

Even in case the Sensex opens +ve options in the short term as discussed, we should keep the 30% principlein the back of the mind , and act as requi red wh en the t ime comes.

As shown on the chart comparing Sensex with broader indices, one could see a 30%+ cut on thebroader 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 lastf ive years, but fai led every tim e. Even during the current year, three such attempts were made, mainly withthe help of ITC, but Index failed.

Despite all that, the broader m arket has kept i tsel f sup pressed. Indeed, BSE Small-Cap and Mid-Cap

Index both shaved off over 30% during 2013. Further many investors stocks touched 2008 lows or evenlower levels. Some of the favorite stocks from PSU / Infrastructure virtually turned into penny stocks.

Under the circum stances, the market does not app ear runn ing away. The long -term 7-8 year

consol idat ion should cont inue in the broader market , i f not on Sensex i tse l f.

The recent supportive effort was seen prot ecting th e Grid level near 17800which was shown on the followingchart. The upsid e Grid is at abou t 20250.


10/30

Since Jan13, Sensex kept reacting low er from t he Grid level at 20250, and later dropped to the lower

Grid level at 17800. As we noted, VPs 2450-po in t Gr id System, thus, cont inues to pro vide importantturning points since the year 2008.

As was suspected, the Dollar-Rupee equation keeps guid ing the mov ement of the stock m arket. Therecent high o f Dol lar, at 69.23, achieved our p rojection s made on 24

thJun13.

In the Weekly Report d ated 24thJun13, it was argued that the Dollar-Rupee equation h as an inverted

relationship with Sensex. Based on the Wave-structure shown, it was contended that :

The year-long consolidation phase from Jun12 to May13 on the Dollar-Rupee chart looks like a 3rd

Extension5

thFailure Terminal. On one higher degree, the Terminal could be part of an Irregular C-Failure Flat from

Jan12. If true, then as per NEoWave principles, Dollar can achieve 67 by Aug14 .

As per NEoWave, after an Irregular C-Fai lure Flat, the next mo ve sho uld u sual ly achieve 161.8% ratio to

its b leg from the end-point of c. Time-wise, th is pro ject ion is u sual ly achieved wi th in the tota l per iodconsum ed by the Flat ,i.e. within 16 months from Apr13.

Remember, the projected level of Rs.67 was the minimum level to be achieved by Aug14. It was arguedthat in actual terms it could reach higher than 67. Dollar-Rupee achieved 67 as was projected, and hit 69.23.


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On the Sensex chart, we had assumed that a major top was made during Jan13 as per Jan -ToppingCycle. As it has been a totally polarized and selective market, the BSE Small and Mid -Cap Indexes shedover 30% each during 2013.

Indeed, this time the broader mark et has been leading the bearish sentim enteven while Sensex washolding higher with the help of few heavyweights, mainly ITC.

While Sensex cons ists of 30 stock s, the BSE Small-cap univers e comp rises 459 and Mid-Cap 233

act ively traded stock s. Whi le Sensex universe m ost ly c ompr ise inst i tu t iona l hold ings, broader universe

affects the sm al l investor.

We had already followed a cautious approach near the 6 year highs. Earlier during Jan13, based on the Jan-Topping Cycle (explained elsewhere in this report), we had warned of a major cycle top. Since Jan13,major damages were seen in the broader market as wel l as many ind iv idual stock s and s ectors.

Multi-Year long Diametric Formation

It was argued that all mul t i - fo ld ra ll ies w ould be fo l low ed by m ul t i -year long conso l idations. 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 starting2008. Further, the cons ol idation, may sh ape up l ike a 7-legged Diametric, similar to the consolidation seenfrom 1992 to 2003.


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The Diametric formation from 2008 is also suspected because each of i ts intern al legs, except B, haveconsum ed about 13 month sso far. So, the E wave from Jan13 could also continue for about 13 months,and end som ewhere around Feb-Mar14.

This long- term picture was f is t pu bl ished on6thFeb2012, 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 Cleg. In the current instance, D retraced 84% of C.

Long-term corrective phase on Dows chart from the year '2000 onwards also appears to be a probable 7-legged Diametric. Instead of Bow-Tie Diametric on Sensex,Dows Diametric is shaping up as Diamond-Shaped Diametric.

Jan-Mar Topping Cycle

During Dec12, it was pointed out that major top s occ urred durin g 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 arguedthat Sensex could hit a major top during Jan13, and it did. Substanti al damage was, however, seen main ly i n thebroader market.


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This cycle may be the result of NAV pop-up exercise in the last month of the Calendar Year. Jan13 was the 7th

such top forming in the month of Jan.

Performance of the Broader Market

The broader m arket has, general ly, und er-performed the main Index since the year 2008, as can bechecked on the chart below.


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Indeed, the broader Mid-Cap and Small-Cap Indices have also broken 0-b lines (Red color lines) of the upwardD leg. The Small-cap Index even broke its Jun12 levels, and gave a faster retracement to the c part of post-Dec11 rally.

Indeed, while the Sensex itsel f retraced 89% of i t preceding 13-month fall from Nov10 to Dec11, BSESmall-Cap Index retraced on ly 38.2%, and h as, in fact, reacted h eavi ly from this retracem ent level.

The divergence between Sensex and broader mark et appears to be Index m anagement activi ty, as the

Sensex is held by the Index heavy-weights, whi le the broader show s distr ibut ion. This w hole th ing,

however, made for a tr icky and unc omfor tab le trad ing envi ronment.

NEoWave Discussions

Inside the D leg from Dec11 to Jan13, we had had assumed a 3 -legged a-b-c Flat. The c part was a 5-legged

Impulse, inside which, 5thleg (beginning Nov12) was assumed to be a Terminal.

Based on NEoWave requirements, i t was argued that Sensex wou ld drop below Nov12 lows in 50% timeof th e 48-day long Terminal. Index eventually did drop below Nov12, but took 48 day or 100% time(inst ead of 50%).

As an abundant precaution, therefore, fo l lowing al ternate wave-structure was suggested for the D leg fromDec11. D is now completing 161.8% time ratio to C.


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In the alternate scenario, c ended at Oct12 high, and it was equal to a leg. The d was the smallestsegment, and e (i.e. post-Nov12 rally) was a Double Combination which ended in Jan13.

The post-Nov12 rally is retraced by 100% on Sensex, but more than 100% on broader indices. Thelarger picture of Diametric from 2008 onwards is, therefore, considered probable.

That would mean 13-month long D-leg has ended at Jan13 highs, and 13-month long E-leg started thereafter.

NEoWave, remember, allows exceptions to rules at important market turning points or under unusualcondi t ions,like end of larger patterns or last wave, such as a Terminal.

Also, Triangles and Terminals are exceptions to v irtual ly al l rules. Since Diametric p attern is made up ofTriangles, NEoWave Exception Rule is also applicable to these patterns.

Since we were at an important turning point in Jan13, and dealing with Terminal and legs of Diametric,

perhaps pattern im pl icat ion ru les could not b e sat is f ied to the fu l l extent .

Does it real ly matter wheth er the Sensex achieves the pattern impl ic ation accurately with in the time-

price parameters, when th e general direction o f the secular m arket has been largely -ve as w e

suspected since Dec12 ?

As we argued, the larger bear phase is already v isible in the broader m arket. Since Dec12 we turnedcautious as the rallies were getting smaller (shaping into a Terminal), and also because of the Jan -toppingcycle (discussed separately).


16/30

Terminal we assumed from Nov12 to Jan13, is a special kind of Impulse which occurs in the last waveposi t ion, i.e. either as c of Flat/Zigzag or 5

thof 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 Term inal would develop as a 3-legged o r 5-legged corrective structure,l ike a Flat, Zigzag o r Triangle. Also, 4

thof Terminal must enter the area covered by the 2

nd(Overlap Rule).

Al ine simi lar to th e 2-4 l ine on Sensex can also be draw n on th e broader indices, and the sam e hasbeen broken (as discus sed separately).

Sensex, consumed 59 weeks to retrace 84% of i ts preceding 13-mo nth fal l , which also was a 59-week

affair, as shown on the chart below :

The ral ly, accord ingly, was con sidered slow er, corr ective structu re as per NEoWave, and no t as part of

any fresh ral ly.

The channel enclosing the a-b-c Flat inside the larger D leg from Dec2011 onwards was shown on the chartbelow :


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The 80% retracement level was consid ered and m arked as a pattern imp l ication for the 13-month lo ng

Double Combinat ion m ove m arked as C. Pattern impl icat ions, however, cannot be str ic t ly enforced for

the legs of Triangle and Diametric, whic h are exceptions to the general rules.

As per NEoWave, most channeled moves enclose a Complex Corrective structure involving x wave. ComplexCorrective involving 2 correctives, joined by one x wave, is called a Double Combination, and carriesa pattern impl icat ion of not m ore than about 80%.

Note that the C leg of Sensex, from Nov10 to Dec11, was a Double Combination, with two equal-sizedcorrectiv es (see weekly ch art given above), and th erefore, carr ied a pattern impl ication of 80%

retracement by t he D leg.

Further, as depicted on the chart below, since Nov10, it has been generally useful to consider 61.8% to80% retracement area as cruc ial for terminating m oves.


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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 cleg should normally end near such parallel. The channel indicates sim i lar i ty of i ts 3 internal legs, reasonwh y Flats are cal led Flats.

Inside c of D (beginning Jun12) for Sensex, we were expecting a 5- legged Impu lse,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 1stand 3

rdwere normal, we could have projected 5

thwave Extension. However, such a move would

project values slightly above the Nov10 highs, which would jeopardize the larger assumption of Bow-Tie

shaped Diametric from 2008 onwards.

We, therefore, preferred 5thof c not to achieve 161.8% ratio, but terminate below Nov10 highs, from

where a downward E would open.Since E begins the expanding phase of the Bow-Tie Diametric, it wouldbreak below Dec11 lows.

The 1stand 3

rdinside c of D continued for about 4-5 weeks each. We expected 5

thto consume a similar time,

and end somewhere in the month of Dec12 or near to it.


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As the beginn ing part of 5thshow s vio lence on ups ide, we suspected 5

thcould d evelop internal ly as a

1stExtension Impu lse 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 magni tude from Aleg to D leg. The D leg is the smal lest segm ent of the Bow -Tie shaped Diametric.

The other half of this Diametric, i .e. E-F-G legs, should sh ow expand ing m agnitud es, and therefore, Esho uld becom e larger than the D leg. This can happ en only when E breaks the bottom Dec2011.

After breaking the 13-month long channeled C (from Nov10 to Dec11), we had suspected that developmentpost Dec11 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 Nov10 was not an Impulse. A Non-impulsive C leg couldonly 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 Dol lex-30 Index, which sh ow ed a Head & Shoulders fo rmationaround Oct12 on itsDaily chart.

Its downsides later achieved the Head-to-Neckl ine projection on dow nside, as we expected. Since theprojection level also matched with i ts 200-day EMA, we suspected som e pul l -back. It did pul l back ti l l

Jan13.

This Index achieved H&S protection and has now recovered abov e its 200-day EMA.


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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 year ly low gets broken, a min imum of 20% cut from the low

has been a usual phenomenon, thoug h gradual ly . A 20% magni tude reduced from 15652 would

calculate to abou t 12500 for Sensex.

This level has not been touched so far , but should b e remembered as a cruc ia l leve l which m atches

with th e huge gap-up action (refer to the Weekly chart discu ssing 32-week cycle) seen during the 2009.


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32-Week time cycle

The development since Mar09 has followed a 32-week tim e cycle, as shown on the chart below.


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This was used for ra is ing a possib i l i ty that an important low w ould be formed around 20thAug11.

Sensex responded by hi t t ing the bottom on 26thAug.

This cycle had also ra ised the possib i l i ty of an up ward/s ideways phase that could s urv ive for 32 weeks

from Aug11, and end either on 4thFeb12 or 31

stMar12, developing as a ranged movement like the Left

Shoulder. The upward phase ended during Feb12 as per this cycle.

Going by the structural possibilities from this cycle, it was suspected that Sensex could be forming an eleg of a pos sible Extracting Triangle, whi ch wo uld remain sm al ler than the c leg. The e leg didremain smal ler as susp ected.

As we already know, Extract ing Tr iangle is a p attern w hich s hows smal ler ra ll ies and bigger drops . Thusin one direction, it shows e < c < a, and in the opposite direction, it shows d > b.

Above 18000, Right Shou lder became bigger that the Left Should er, whic h appeared rejecting th e Head

& shoulders or Extracting Triangle argument. However, the 32-week time cycle m ay remain val id as acycle even from h ere.

The Sensex was seen testing the Neckline shown on the chart, which did prove crucial, as Sensexbounced several t imes fro m the Neckl ine.

Ano ther idea would be to m ark the entire developm ent as a Diametric, instead of Extracting Triangle,

and the same is now m arked on the chart . These assum pt ions ind icate an incomplete B, but conf i rms

only on faster drop b elow the Neckl ine, whic h is sti l l awaited.


23/30

Recent recovery happens to be exactly at 32-week cycle turning p oint.

30% Principle

Al l major tops are character ized by 30% drop from the top v alue. This is norm al not only ins ide a bearphase, but is comm only s een even ins ide a bul l phase too. The 30% taken out from the current top

value on Sensex (21109) would be less than 14800.

The total loss s o far, from th e high of 21109 to 15425, measu res around 28% so far. However, on BSESmall-Cap and MidCap Index, the loss from 2010 high does measure more than 30% .

Overal l , i t was argued much earl ier, that we wou ld see a topp ing form ation spread over 2-3 month

period beginning Oct10. This played out w el l as susp ected. Indeed, as was observed, 60% of stoc kstopped out during Oct10 itself, and many have already shaved off much more than 30%, thoughSensex itsel f shaved off on ly 28%.

2450-point Grid chart for the Sensex

Sensex has been fol low ing a Grid of 2450-2500 points since 2008. These Grids are shown on the Weeklychart of Sensex below. One can find a bottom or a top getting formed at each of the Grid levels.


24/30

Index during 2013 reacted thrice from the Grid level at 20250, and is now protecting the next lower Gr id level at 17800.

The larger picture

Our markets, remember, has seen mul t i fo ld ra l l ies previously , each t ime con t inu ing for about 4 (four)years, after which , i t usu al ly enters a mu lt i -year con sol idation p hase. In other words, long-term hasalways meant 4 years in Indian context.

Remember, Sensex rallied 11-fold from 390 (Mar88) to 4546 (Apr92)in four years, after which itconsolidated 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 levelsto 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 Jan08 was a Triple Combination A leg of a large mult i -yearconsolidation. The corrective phase beginning Mar09 retraced about 99% of the previous fallfrom21206 (Jan09) to 8867 (Mar09), (which was labeled as a Triple Combination).The longer time requiredwhi le ral ly ing is sym ptomat ic of its corrective label of B.

The rally from 8047 (actually beginning at 8867) was, therefore, considered as the B leg. The next legdownwards would be labeled as C.Such a-b-c development since Jan08 would be considered part ofthe 2

ndwave of what appears as a probable Terminalbeginning 2003.


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Even though we saw the market reaching levels above Jan08 highs, the multi-year conso l idation isexpected to sh ape up l ike a large decade-long Diametric, looking similar to the consolidation we saw from1992 to 2003. Our trad ing/ investment stra teg ies should be designed accord ing ly .

The suspected corrective phase beginning Jan08 would be the 2ndwave with in the larger 5

thwave.This

5thwave is suspected to be forming as a Terminal due to absence of impuls ive behavior in i ts in terna l 1

st

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 developm ent usual ly vio lates the 2-4 l ine.

The Sensex is assumed to be under the influence of a large 8-year cycle ever since its birth. As shown on thechart below, '1984 was the beginn ing of 8-year long bul l -run t i l l '1992.In our Super-Cycle Degree count,shown on ASA Long-Term chart under a separate paragraph, weve considered 1984 as the beginning point forthe most dynamic 3rd wave.

The next two important turn ing points occu rred exact ly 8 yearsthereaft er, in '1992 and '2000. Both theseturning points were marked by stock market scams, because of which, the leaders of the rally had extremelydifficult 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 bythe 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, thecut was almost 58% from 6150 in 2000 to 2594 in 2001 .

We had, accordingly, targeted sub -10k levels for Sens exprice-wise during 2008-09, and a minimum of 13mon ths in to bear phase,time-wise. The price-time targets were achieved as Sensex dropped 63% from21206 to 7697. The yearly channel, shown below, which was used earlier to project 20000 level for the Sensexduring 2007, was broken when the Index moved below 17200. Break of th is long - term c hannel a lsoweighed in favo r of a larger correct ive phase fol lowin g this 8-year cycle.


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The wave-count presented shows that the market is into the lower-degree 5th of the SC-degree 3rd

or 5thwave.

The detailed wave-count from 1984 onwards can be seen on the Monthly chart given below. The 2-4 lineshown on the ASA long-term Chart above, and Monthly chart below, would determine if the post 1984 Impulseis a Super-cycle-degree 3

rdor 5

th.


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Super-Cycle-Degree 3rd

(or 5th) began since Nov84. Its internal 3

rdwas an extended leg, which achieved

exactly 261.8% ratio to the 1ston log scale. The Sensex is now forming the 5

thWave, and the same could

develop as a Terminal, because its lower-degree 1stwave from May03 onwards developed as a Diametric(which is a corrective structure, rather than an impulse). Within the non -directional legs, 2nd was exactly61.8% 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 4this shown as a 3-legged a-b-c Flat on the monthly chart above. Alternatively, the 4

this 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-yearparallel 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.


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.

As mentioned above, the lower-degree 1stfrom May2003 to Jan2008 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 initiallyContracting up to the "d" leg, followed by an Expanding one. The contraction point is the "d" leg, and the legson 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 thecorrective structure in the 1

stleg, the higher-degree 5

thcould 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.


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As per NEoWave, break of 2-4 line confirms a Terminal development, and If the 5th

proves to be a Terminal, theSuper-Cycle-degree label of 3

rdwill have to change to 5

th, because only a 5

thof a 3

rdcannot be a Terminal. Only

a 5thof the 5thcan be a Terminal. The Super-Cycle-Degree marking for 1stand 2ndas shown on ASA long-termchart, would then change to 3

rdand 4

threspectively.

Disclaimer :These notes/comments have been prepared solely to educate those who are interested in theuseful application of Technical Analysis. While due care has been taken in preparing these notes/comments, noresponsibility can be or is assumed for any consequences

weekly technical analysis 28th oct 2013.docx

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