• Sensex corrects 50% of previous rally.

• China announces stimulus plan to boost the economy.

• Export plunge to 5-year lows during October.

• Excise Duty collections dip 8.7% in the month of October.

• SEBI to make withdrawals from FMP schemes tougher.

• IIP numbers improve in September, from 13-year lows in August.

• Crude oil sinks to 20-month low below $57.

• Govt to plug loophole to show forex losses.

• Inflation drops sharply lower to near 6-month low of 8.98%.

• RBI provides stimulus package to boost credit market.

Sensex corrects 50% of previous rally, 61.8% at 8950, 80% at 8350

Last week I wrote, “examination of all the first segment of rallies since ‘Jan, shows that - The ‘Jan rally got corrected by extent of 34% - The ‘Mar rally was corrected by 64% - The ‘Jul rally was corrected by 53% … all of these correction levels are close to the Fibonacci ratios … The 38.2% - 50% - 61.8% Fibonacci correction levels (to the current rally) would work out to 9704 / 9322 / 8940 … In case the Sensex takes support at the Fibonacci correction levels, the short-term reversal we were expecting, can turn out to be a medium-term reversal, which will not break last week’s low of 7697 till this year-end.”

Initially holding 38.2% correction level, Index rallied 600 points to 10570. This rally corrected about 80% of 2-day drop from 10945 to 9631, and formed as a “b” leg within what appeared as a Flat formation beginning 10945. The “c” leg then dropped lower, below “a”, to achieve an exact equality to “a” as of Friday’s low.

Remember, we are watching Fibonacci correction levels on the basis of Sensex’ history since ‘Jan, about which I explained last week. This is despite the fact that the internal construction of the 6-day rally from 7697 to 10945 actually shows a Double Zigzag formation, which has pattern implication of 80% (which means Sensex level of 8347). 

Disregarding 80% pattern implication is possible if the pattern from the lows of 7697 develops as a Triangle or Diametric, legs of which usually defy such pattern implications. Remember, Sensex had formed Diametric during ‘Jan-Feb rally and Extracting Triangle during ‘July-August rally.

The net loss for the week was 580 points or 5.8% on the Sensex. The biggest loser was the Realty sector which lost 14%, and Capital Goods sector which lost 9%. Auto sector was also down 8.5% for the week.



The Flat post-10945 could either be “b” leg within the bear market rally from 7697 (rally to labeled as second “x”), or “e” of the still-unfinished Double Combination fall from 15107, as marked on the Daily chart above. In both cases, however, we need to see faster retracement above 10945. Till that occurs, structure will remain open to various interpretations.

As shown on the 30-minute chart, at Friday’s low of 9267, the “c” of our assumed Flat exactly achieves equality to “a”. The “a” of this Flat was from 10945 (5^th Nov) to 9632 (7^th Nov) and the “b” was from 9632 (7^th Nov) to 10570 (10^th Nov). The “b” leg showed an exact 161.8% time ratio with “a” leg on intra-day charts.

Time-wise, this Flat has now completed six trading sessions, in fact consuming a slightly larger period on intra-day chart, as compared to the previous 6-day rally from 7697 to 10945. Since Index has lost only 50% price in more time, the structure inherits a positive bias. 

We, however, are still kept waiting for the positive outcome as a result of this bias, and we’ll continue to do so, at various Fibonacci correction levels marked on the chart.

Confirmation of next up-move would need a faster retracement above 0-b line of the Flat joining highs of last two weeks, 10945 (5^th Nov) and 10570 (10^th Nov). This will provide stage 1 confirmation. Stage 2 would need faster retracement of the entire “c” leg. This 0-b line is shown in Red color on the daily chart above. 

One can have two different approaches dealing with the current situation. The first would be to look for buying opportunities on panics while the Sensex tests various Fibonacci correction levels. And the other, a safer one, would be to wait for said confirmations, which, unfortunately, can occur only at higher levels.

These contentions would also be in line with the time analysis that I have been presenting, which shows a peculiar time pattern since ‘Jan this year. As marked on the chart below, Sensex shows falling segments lasting for 10 to 11 weeks, which are then followed by rallying segments lasting anything from 4 to 7 weeks.” 

As per this phenomenon, we are likely to see the bottom at 7697 holding till the end of this year, resulting in a positive market for the next 4 to 7 weeks.



Failure to hold the Fibonacci correction levels (or 80% pattern implication for the Double Zigzag rally) and failure to confirm upsides as specified above would be our bear case scenario. 

In any case, the best part of this bear market rally is over in the first 6 trading sessions from 7697 (27^th Oct) to 10945 (5^th Nov), and we are dealing with leftovers. Remember, things turn difficult when the entry is late. Note that we had entered as well as exited at the right time.

It actually turned out to be a nice 42% rally in just 6 trading sessions, and was the strongest rally so far since ‘Jan. It not only proved my contention for a short-term reversal, but also generated decent profits under the circumstances. 

Remember, however, profits would have been trimmed or even disappeared if we did not have the profit-booking policy in place. I had, accordingly, advised a gradual profit-booking on long positions.

From 15107, Sensex has been forming a “c” leg down. Though we normally expect 5-legged Impulse formation in “c” wave, the “c” of Triangle / Terminal / Diametric formations have Corrective label. I am, however, assuming a channeled Complex Corrective in the current “c” simply because it is helping our trading strategies. 

I had earlier targeted sub-10k levels since ‘Jan, and the same have been achieved, the time targets are still to be achieved. Remember, in technical analysis, both time and price forecasts must be achieved. Long-term investors better wait till then.

From the channel perspective, the upper limits for any bear market rally were shown to be closer to the upper end of the Purple channels shown on the Weekly chart below. The most recent high of 10945 tested the upper end of the original channel, from where the Index has been reacting during the last two weeks.



The yearly channel, which I used earlier to project 20000 level for Sensex during ‘2007, was broken when the Sensex moved below 17200. Break of this long-term channel also weighs in favor of the larger bear phase as per 8-year cycle.




The 8-Year Cycle 

A much bigger cycle is the 8-year cycle. As shown on the chart below, '1984 was the beginning of 8-year long bull-run till '1992. In my Super-Cycle Degree count, shown on ASA Long-Term chart under a separate para, I have, in fact, taken ‘1984 as the beginning point for the most dynamic 3rd wave. 

The next two important turning points occurred exactly 8 years thereafter, in '1992 and '2000. Both these turning points were marked by stock market scams, wherein 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, had lost as much as 90% of their top valuations by the year '2003. 

This year, we are sitting on this very important cycle, which therefore, may throw up similar possibilities. 

Alternative scenarios for Sensex

As far as larger wave scenario is concerned, I have been explaining two alternatives : 

The first one assumes that a large Triple Combination corrective, beginning Sep'1994 got over in Oct'2005 at 7656. The last corrective within this Complex Corrective phase formed as a "Non-Limiting" Running Triangle, the breakout from which has already occurred. This has been my preferred scenario for many years. (Remember, Non-limiting Triangles, as the name suggests, do not impose any limit on the post-pattern behavior).

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 gave 20000 as the "minimum" target for Sensex. The same has been achieved already.



As per the alternative bearish scenario, a Diametric had been developing into Sensex' 5th leg of impulse. In this alternative, the 4th wave ended at May'2003 low near 2904. The 5^th leg, being a non-extended wave of the Impulse, should not have gone much beyond 61.8% ratio to the 3^rd, which projected a maximum of 13300. In this argument, the 5th wave was assumed to be the "non-extended" leg within the Super-cycle degree 3^rd which began at 259 in Nov'1984 as shown below. (in an Impulse pattern, only one directional leg can be the extended leg.) As per this wave-structure, the 3rd (of the 3^rd) was shown to be the extended leg, which achieved exactly 261.8% ratio to the 1^st on log scale. The 2nd was exactly 61.8% of 1st value-wise, and 161.8% time-wise. The 4th was 38.2% of 3rd value-wise, and 261.8% time-wise, as shown below. 

There are good ratios present within different waves, as explained on the chart, to support this scenario. However, the Sensex sustaining well above 13300 may lead to a "Double Extension" scenario even by this alternative, wherein both 3rd as well as 5th would be extended waves. 



The development into 5th wave was read as a "Diametric" formation. It was explained that the well-channeled legs, with a subsequent correction of less than 61.8%, led to the suspicion of a "Diametric" formation. (Remember, channeled moves usually indicate complex correctives, which should normally get retraced by more than 61.8%, except within the new pattern called "Diametric"). Diametric formation has 7 legs, marked as a-b-c-d-e-f-g. It is called a "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% gain. Similarly, "g" achieved equality to "a", both showing about 115% gain. 

This Diametric could be taken as the 1st of the 5th (5th, which, due to its corrective structure, could be developing as a Terminal wave). This Diametric in the 1st leg of probable Terminal wave appears to have ended at 'Jan'08, and we may be looking at the 2nd wave downwards within this Terminal.

. 

The "Double Extension" scenario was also been shown below using ASA Adjusted Long-term Index chart. I've created this chart combining Index figures compiled by a British advisor (from '1938 to '1945), RBI Index figures ('1945 to '1969), F.E Index ('1969 to '1980) and Sensex (thereafter till date). 

The chart shows the Super-Cycle-Degree count that I had been presenting since many years ago. The labeling shows that the market is into the 5th of the SC-degree 3rd wave. This 5th leg (within SC degree 3rd) may have begun either from 2904 (May'2003) or from 7656 (Oct'05). In case of the "Double Extension" scenario turns out to be true, Sensex could be projected to achieve even 50000+.

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