Weekly Technical Analysis
13 Apr 2009
- By Vivek Patil, India's foremost expert in Elliot Wave Analysis
 
Top Stories of the Week


  • Sensex crosses 10470, in a 5th straight gaining week.

  • Exports dip 18% in Mar'09.

  • India's IIP contracts 1.2% in Feb'09 against 9.5% growth last year.

  • Inflation drops to 30-year low at 0.26%

  • Bulk deposit rates crash following surplus liquidity.

  • Enthusiastic response seen for booking Tata's Nano.


Sensex up 34% from lows, watch for profit-booking after 5 weeks of gains


Recently I have been arguing that “Triple Combination from Jan’08 has most likely ended in 14 months at 8867 on 20th Mar’09 … A faster move above 10470 and thereafter above 10945, along with higher bottom higher top is, however, still awaited to confirm the end of the corrective … End of any bear phase usually sees complete retracement of an entire last pattern, and that too, in about less than 50% time of the pattern … A move above 10470 would achieve that requirement because the 3rd corrective had consumed 47 days, and we are close to confirmation of faster retracement in 17 days, which is indeed less than 50% time.”

The 3-day truncated week saw Sensex sending additional confirmation by crossing 10470, also hitting a high at 10932 and closing 4.4% higher. 

Realty Index outperformed with a gain of nearly 14%. Small-Cap Index also did better, finishing as much as 10% higher. Stock-wise, Reliance Indl. Infra. proved a major gainer, up 158%, while Akruti City continued losing more, down 14% for the week.




Last week’s higher close generated a consecutive 5th week of gain for the Sensex. Note that ever since Jan’2008, five had been maximum number of weekly gains. (The last such stretch was recorded from 18th Mar to 5th May’2008, within the move from 14677 to 17735). 

Going by this time observation, along with the fact that the Sensex is now testing its 6-month highs near 11K mark, we may adopt a cautious approach during the coming week if the Sensex fails to trade above last week’s high of 10932.

Under these conditions, investors may have to go in for some kind of hedging on their investments.


Trading above 10932, however, can maintain the positive bias for higher targets of 11200-400 on the Sensex.



While faster move above 10470 has been achieved, we still wait for higher bottom higher top formation on the long term closing charts, for the final confirmation that the Triple Combination since Jan’2008 is over.

Remember, as I said last time, once we have all these technical confirmations in place “even a catastrophic event may only result in a dip that creates a higher bottom, and would be an opportunity to buy, though at a higher level, perhaps at 50% or 61.8% correction level to the current rally.

Five weeks ago, based on the wave-structure for Dow, I had argued thatDow will not break its recent lows for about a month. This had already prompted me to postpone the time zone for occurrence of catastrophe. The possibility of such an event is, however, not totally eliminated, as it is a matter of history, seen at the end of previous two bear cycles.”

Earlier I assumed the end of Triple Combination since Jan’2008, finishing with a small Terminal at 8867 (20th Mar’09).

With higher bottom still to be formed for confirmation, we may be into the next upward wave, “b” wave, which could correct the 14-month long Triple Combination by as much as 50%. 

This would target about 14500 over a period 1 year or more. Within this up wave, Index may stop at about 11000, and then at 12500, before 14500 is achieved. During the coming year, therefore, investors may take their calls accordingly. 

From hereon, the first indication of weakness needs creation of a DOWN day, where both high and low of a day is lower than the previous day

As can also be seen within the move from the most recent low of 8047, each segment of rally lasted for exactly five UP days on the Daily chart. In its latest segment of rally post- 9520, Sensex has now completed the 3rd stretch on 5 UP days. Will it then correct for couple of days from here ?


We may, therefore, watch if the Index can trade above Thursday’s high of 10932, and breaks the low at 10655 in order to create a DOWN day as required to generate weakness. 

The initial guess, in such a case, would allow a 2-day kind of correction. However, correction lasting for more than two days can lead to a deeper cut testing about 10590 / 10200 or lower

As per 8-year cycle, we saw three bear phases unfolding during the life-time of the Sensex so far. These three phases are as follows :

1. 1992 : Index dropped 57% from 4546 (Apr’92) to 1980 (Mar’93).
2. 2000 : Index dropped 58% from 6150 (Feb’00) to 2595 (Sep’01).
3. 2008 : Index dropped 63% from 21206 (Jan’08) to 7697 (Oct’08) [so far].

A study of these three bear phases throws up an interesting list of similar parameters :

1. Sensex lost about 60%.
2. It took 13 to 16 months to achieve lowest point of the phase.
3. There were 4 to 5 sell-offs.
4. There was a particular group of stocks that performed at the tops, “Old Economy” during ‘1992, “New Economy” during ‘2000 and “Property” during ‘2008.
5. Cycle heroes faced difficult times for 5-10 years
6. Stock market Scam.
7. Scam related to cycle performing sector, “old economy” during ‘1992, “new economy” during ‘2000 and “property” during ‘2008.
8. The scam-tainted bull was taken to jail, Harshad, Ketan, Raju.
9. The phase ended with a higher bottom higher top with faster retracement of the last falling segment.
10. The lowest level of the phase was hit after a catastrophic event unfolded, “Bombay Bomb Blast”, “WTC collapse”, ????.

Of this, the last parameter is still awaited to get unfolded. Students of Technical Analysis may note that “history repeats” is one of the three basic pillars of Technical Analysis.

While wondering when such an event takes place, I had explained how to deal with the situation wherein bottom is made without the occurrence of a catastrophic event. 

I had argued that, “we may,
look for higher bottom higher top formation with faster retracement of the last falling segment to make any judgment against the history.”

As per the parameters for the 8-year cycle,
Sensex has a habit of moving closer to the bottom after 4 to 5 sell offs. 



The 5th sell-off remained limited to 8047 due to high public readiness to take benefit out of it, and absence of catastrophic event required to push it lower
.


Earlier I showed that the bear phase since Jan’2008 was a Triple Combination. I had said, “Triple Combination can occur only as the largest leg of a Triangle (or Terminal). Therefore, the fall from ‘Jan highs is likely to be the “a” or first leg of the larger Triangle.”

A Triangle always has exactly five legs, to be marked as a-b-c-d-e. Once “a” of Triangle is over, configuring as a Triple Combination, “b” leg should move higher to about 50% of “a” leg. Of the four retracing legs of a Triangle, 3 out of 4 should retrace at least 50% of their respective previous legs. On confirmation, as explained above, the current up-move will be labeled as the “b” leg of such Triangle.

Since “a” leg would have consumed about 14-15 months since Jan’08, the entire Triangle, consisting of five legs, could consume 5 years.


The suspected 5-year Triangle would be 2nd wave within 5th. This 5th wave could be forming as a Terminal. Terminal confirms if the Sensex drops below the 2-4 line on one higher degree. One may see the last chart of this Report (Yearly chart), which shows the 2-4 line and its value. Remember, Terminal development usually violates the 2-4 line.

From the channel perspective, the upper limits for any bear market rally were shown to be closer to the Purple lines shown on the Weekly chart below. Note that the latest highs have broken above the middle channel line.

The Index is now testing the upper channel at about 11200 for the coming week, where we may watch for resistance, if any.



Earlier I also argued that
Previous bear markets (as per 8-year cycle), during 1992-93 and later during 2000-03, had seen 4 to 5 sell-offs. Smart investors may please note this fact, and may risk their capital in a staggered  manner until our bullish confirmations, like faster retracement of falling segment or higher top higher bottom formation, are in place.

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 weighed in favor of the larger bear phase as per 8-year cycle, and Index lost 62% from highs.




The 8-Year Cycle and its implications

The Sensex is assumed to be under a larger 8-year cycle ever since its birth. As shown on the chart below, '1984 was the beginning of 8-year long bull-run till '1992. In my Super-Cycle Degree count, shown on ASA Long-Term chart under a separate paragraph, I have, in fact, taken ‘1984 as the beginning point for the most dynamic 3rd wave. 

The next two important turning points occurred exactly 8 years thereafter, in '1992 and '2000. Both these turning points were marked by stock market scams, because of which the leaders of the rally had extremely difficult time later. For example, ACC, the leading stock of '1992 bull market, remained below its highs till end of '2004. Similarly, the IT stocks, which were leaders of '2000 rally, lost as much as 90% of their top valuations by the year '2003, and most are below their top levels even today.


Last year, we were sitting on this very important cycle
, which therefore, threw up similar possibilities.



Remember, every 8 years, market does see a deep cut in valuations. In the previous 8-year cycle top during ‘1992-93, Sensex lost 56% from 4546 to 1980. In the next cycle top, the cut was almost 58% from 6150 in ‘2000 to 2594 in ‘2001. Time-wise, ‘1992 cycle completed the bear phase in 12-16 months, while the ‘2000 cycle took 19 months only to hit the low, which was then followed by 19 months of base formation before bull phase could begin again.

I had, accordingly, targeted sub-10k levels for Sensex price-wise, and a minimum of 13 months into bear phase time-wise. Though the price targets have been achieved, the time targets are yet to be achieved. Remember, in technical analysis, both time and price forecasts must be achieved. Long-term investors should, therefore, wait till then. As long as Sensex keeps on making lower highs, the bear phase continues.

Besides price \ time damage, I have been mentioning scam as a usual occurrence after 8-year cycle top. In the current cycle, this may have, or will unfold further in the Global financial markets. The size of the figures will, therefore, be much larger than the earlier ones, and so will be the number of people involved in it. 


Furthermore, the history shows that the bull always goes to jail. (Raju did).

Another parameter that leads to the actual lowest value of the bear cycle is the catastrophic event. Such event would be a terrible disaster or accident, especially the one that leads to a great loss of life. The last two cycles had seen terrorist activities, serial blast in Mumbai during ‘1993 and WTC tower collapse during ‘2001. 


These events happen suddenly, without any warning, and their catastrophic proportions are not known even while they are happening. During ‘1993, one blast would have been normal, but 13 serially proved catastrophic. During ‘2001, 1st hit could have been an accident, but two in succession was catastrophic.

These events led to such desperation that the lows created thereafter were never ever broken again, Sensex low of 1980 during ‘1993 and 2584 during ‘2001.

Ironically, therefore, such events did, and will provide the best of the investment opportunity to an investor, who is able to take it when it comes. If so, we could be on watch, from now till whenever it occurs. 

With recent accounting scam from Satyam, one more parameter of bear market has unfolded as was argued for. The last remaining parameter would the catastrophic event, which we are waiting for. At 7700, having seen the required 62% cut from high of 21206. 


Alternative scenarios for Sensex

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

The first one assumes that a large Triple Combination corrective, beginning Sep'1994 got over in Oct'2005 at 7656. The last corrective within this Complex Corrective phase formed as a "Non-Limiting" Running Triangle, the breakout from which has already happened. This has been my preferred scenario for many years. (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 also gave 20000 as the “minimum” target. The forecast was achieved.




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 5th leg, being a non-extended wave of the Impulse, should not have gone much beyond 61.8% ratio to the 3rd, which projected a maximum of 13300. In this argument, the 5th wave was assumed to be the "non-extended" leg within the 3rd which began at 259 in Nov'1984 as shown below. (in an Impulse pattern, only one directional leg can be the extended leg.) As per this wave-structure, the 3rd (of the 3rd) was shown to be the extended leg, which achieved exactly 261.8% ratio to the 1st on log scale. The 2nd was exactly 61.8% of 1st value-wise, and 161.8% time-wise. The 4th was 38.2% of 3rd value-wise, and 261.8% time-wise, as shown below. 

There are good ratios present within different waves, as explained on the chart, to support this scenario. However, the Sensex sustaining well above 13300 thereafter, may lead to a "Double Extension" scenario 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, as marked above. It was explained that the well-channeled Complex Corrective legs, with a subsequent correction of less than 61.8%, led to the suspicion of a "Diametric" formation. (Remember, channeled moves indicate complex correctives, which should normally get retraced more than 61.8%, except within a new pattern called "Diametric"). Diametric formation has 7 legs, marked as a-b-c-d-e-f-g. It is called "Diametric" because it combines two Triangular patterns, one initially contracting up to the "d" leg, followed by an Expanding one, thereafter. The contraction point is the "d" leg, and the legs on either sides of it tend to be equal. Accordingly, "c" and "e" were equal in "log scale", both showing about 60% gains. Similarly, "g" would be equal to "a", both showing about 115% gain. 

This Diametric could be taken as the 1st of the 5th (5th, which, due to its corrective structure on one lower degree, could be developing as a Terminal wave). This 1st leg Diametric appears to have ended at 'Jan'08, and we may be looking at the 2nd wave, which, due to its violent beginning, could be forming as a Triangle.



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

The chart shows the Super-Cycle-Degree count that I had been presenting since many years ago. The labeling shows that the market is into the 5th of the SC-degree 3rd wave. This 5th leg (within SC degree 3rd) may have begun either from 2904 (May'2003) or from 7656 (Oct'05).
If a "Double Extension" unfolds, Sensex could be projected to achieve even 50000+. Break of 2-4 line, however, would confirm the Terminal development inside the 5th, and would therefore, restrict the upsides to much lower levels, though higher than 21206.




 



 

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.