Weekly Technical Analysis
January 09, 2017
- By Vivek Patil, India's foremost expert in Elliot Wave Analysis
 
Top Stories of the Week


  • Sensex up 0.5%, retraces fall in faster time, first time since Sep'16.

  • I-Tax Dept mining data to dig out unaccounted incomes.

  • SBI slashes rate by 90 bps.

  • Jan Dhan deposits double to Rs. 87000 crs in 45 days.

  • FM says impact of demonetisation was not severe.

  • Manufacturing PMI sees steepest fall since Nov'2008.

  • PayTM gets nod for payments bank.

  • BHIM figures under top free App downloads.

  • Reliance offers reduced diesel price by Re.1.

  • Services PMI contract after demonetisation.

  • 94% of demonetised currency is reported to be back in the banks.

  • President says demonetisation may lead to temporary slowdown and hurt the poor.

  • GDP growth slows down to 7.1% before demonetisation.

  • Inflows to equity mutual fund at 118-month in Dec'16.

  • Opposition parties approach President & EC for postponement of Budget.


Sensex retraces fall faster - But since oscillator is overbought, watch Thursday's gap-up


[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, “Index recovered smartly, entirely the result of oversold technical position … 4-day rally retraced 88% (Nifty 79%) of preceding 11-day … the question is whether rally would be able to retrace the fall in faster time, for which, 7 days left now … development from Sep’16 could be more appropriately explained as a Diamond-Shaped Diametric … the 11-day fall from 26804 (Nifty 8275) to last week’s low is labeled as ‘g’ or last leg of the Diametric … if the Index does move above 26804 (Nifty 8275), and thus generates faster retracement of the last fall, then it would suggest that a new up-move OR ‘x’ wave has opened … ”

Sensex avoided moving above 26804 (8275) for the first 3 days of the week, but it did finally manage to move above the level on Thursday with a gap-up action
. However, after achieving faster retracement of the fall, it reversed most of Thursday’s gains on Friday, and finally settled only 133 pts or 0.5% higher, forming a High Wave type Stalled Bull candle for the week. While IT proved the only losing sector, most other sectors settled flat to +ve. The Realty and Metal Indexes, up 5 to 7%, led the gains. The Small & Mid-cap universe outperformed Sensex.




It was the first time since Sep’16 top that the Index was able to retrace a falling segment, and that too, in faster time. So far, none of the falling segments were fully retraced. We were looking up to the possibility of such a faster retracement as a crucial event last week.

As we said, by NEoWave, faster retracement of 11-day fall in 8 days opens up the possibility that the downward structure from Sep’16 is over, and another structure in the opposite direction, i.e. upwards, has opened.

We labeled the fall from Sep’16 high of 29077 (Nifty 8969) as a 7-legged Diamond-Shaped Diametric, as marked on the initial Daily chart, and targeted it to achieve downside of about 25000-500 (Nifty 7700-7800)
.




This target was based on 60% pattern implication, as per NEoWave, for the preceding Triple Combination rally from Feb’16 to Sep’16, i.e. “D” leg.

Against our target, Index hit a low of 25718 (Nifty 7894), and we considered that to be good enough achievement, because it comes inside 1-3% tolerance allowed
under NEoWave rules.

On one higher degree, the post Sep’16 fall was marked as “E” leg of the Neutral Triangle from Mar’15, as shown on the chart above.

We said that “E” leg of Neutral Triangle usually achieves similarity with its “A” leg. Such equality projected the possibility that “E” could end in Dec’16 at 25000-500 levels.

Remember, “A” leg of the Neutral Triangle was from Mar’15 to Jun’15, which measured about 3700 Sensex points in 3 months.

The “E” leg measured about 3400 pts in 3 months (from Sep’16 to Dec’16), and thus satisfied the requirements of similarity with “A” leg.




As we showed on the chart above, all corrective phases in Indian market consumed about 13 or 21 months, both of which are Fibonacci Numbers. 

Dec’16 was the 21st month from Mar’15
. Thus, the larger corrective phase may have ended as a Neutral Triangle in 21 months

Accordingly, we raised the question if the Corrective phase is now over, and whether a new up-move has indeed opened from Dec’16
bottom. If it is a new up-move, then Index should move to new all-time highs above Mar’16 high of 30025 (Nifty 9119). 

However, we also mentioned the possibility that the post-Dec’16 move may be only an x-wave
after completing 1st Corrective as Diamond-Shaped Diametric. If it is only an x-wave, then it should end below 61.8% retracement level to the 1st Corrective.

The 61.8% retracement level calculates to about 27800 (Nifty 8560), and the same is accordingly marked on the initial Daily chart as a crucial upside for the current up-move. By NEoWave, a small x-wave should not retrace more than 61.8% of the 1st Corrective.

We will, accordingly, monitor the progress of the current up-move and see if it hesitates before reaching the 61.8% mark, and proves itself as x-wave.

If the up-move proves only as an x-wave, then either “E” on the Neutral Triangle is converting itself into a Complex Corrective OR larger corrective phase may have started from Sep’16, as per 8-year cycle, instead of Mar’15
.

As can be seen the Intra-day chart of Sensex, the current 9-day rally internally comprises of 3 upward segments of rally of about 560-660 Sensex pts., and 3 segments of fall of about 250-300 pts each, including the fall on the last day of the week.

If Friday’s fall was similar to last 2 falling segments inside the current rally, then the question is whether the Index would now recover like it did after previous two 250-300 pt falling segments
.

Note, Friday’s bottom is also testing the gap-up area of Thursday. So, the question is whether the Thursday’s gap-up area would prove technical support as we begin trading for the fresh week.

Accordingly, as the new week begins, Bulls’ immediate concern is to hold Thursday’s gap-up area at 26723-738 (Nifty 8218-24). Holding the gap-up could encourage supportive activity.


In the meanwhile, our Daily Oscillator remains “overbought”. This can be -ve if the fresh week fails to hold Thursday’s gap-up, and indeed weakens to close below the gap-up area. 

Also note that the A/D ratio turned -ve on Friday, for the first time in 9 days. If the Index fails to hold last Thursday’s gap-up area, then we may not rule out a further correction to the 9-day rally. 

We may, however, watch if such a correction remains limited to only 2-3 days. If it does, then Index can recover again once such a pause is over. Generally speaking, despite an overbought oscillator, an up-trend can remain intact if the pauses do not stretch much beyond 2-3 days.

All in all, whether the Index can hold last Thursday’s gap-up area or not appears crucial event to watch in the fresh week.

________________________________________________________________________________


As one can also see on the Daily chart, Index is now moving closer to its crucial 200-day EMA as well as the 50% retracement level. These levels, remember, proved as resistance, twice in the recent past. After last week’s recovery, the Daily Oscillator is also close to overbought zone.

I
f the Index does move above 26804 (Nifty 8275), and thus generates faster retracement of the last fall, then it would suggest that a new up-move OR “x” wave has opened.

We had shown the Yearly trajectory for Sensex on the following chart, and said the lower trajectory line which joins the low of ‘2012 and ‘2013, was valued at 29000 for the Year ‘2017. 

We also said that the lower trajectory line would be definitely broken as we begin trading for the year from this week.


We, however, wondered if this break would lead to disastrous consequences like it did after breaking lower trajectory line in ‘1995 and ‘2008
. At this point, we are only raising the technical concerns and not drawing any conclusions.



A Neutral Triangle is a 5-legged pattern with an Extended “C” leg. Its “A” and “E” leg usually tend towards price-time equality. Since “A” measured about 3750 pts in 3 months, we projected “E” to end near 25000-500 by Dec’16, to achieve time-price equality with “A”.

The “d” of NT ended on 22nd Sep’16 as a Triple Combination, for which, the NEoWave pattern implication is about 60 to 70%. The 60% implication also calculated as 25000-500 (Nifty 7700-7800) as a downside target for “e” of ET.


Low of 25718 (Nifty 7916) was close to our downside target of 25000-500 (Nifty 7700-7800). We had set our downside target on 30th Sep, and Index has fallen within 1-2% tolerance level to the technical target.

Under NEoWave, 3-5% tolerance can be applied to target levels, both price-wise as well as time-wise. Therefore, the question is whether the correction is over, or if it would continue to actually hit the target area.

Our target of 25000-500 (Nifty 7700-7800) was marked on 30th Sep, and Trump victory and Govt’s denotification has only helped Index moved closer to our target.

If the Index fails to hold the 60-70% pattern implication, then the larger scenario of 8-year cycle could unfold. As we all know, the year ‘2016 is on our 8-year cycle. If the Index falls into this spiral, it usually loses 50-60% from the highs.

We had also pointed out that the development over the last 3-4 months was looking like a Head & Shoulders topping formation, with its Head at Sep’16 high and Neckline at Aug’16 lows near 27628 (Nifty 8518).

After Trump Victory in US, and demonetization of high-value notes by the Govt, Index dropped nearly 1700 pts (Nifty 540 pts)

NEoWave believes all chart actions are explained as pattern implication of preceding pattern. This, accordingly, called for re-arrangement of our previous structural assumptions, in order to “explain” or “justify” last Wednesday’s huge fall.

The end-point of larger “D” leg rally from Feb’16 onwards has been shifted backwards to 22nd Sep’16 high of 28872 (Nifty 8893). As a result, the end-point of 3rd Corrective inside “D” also stands shifted to the same point.


At this point, the 3rd of “D” stands completed either as 5-legged Extracting Triangle (as shown on the Daily chart) OR as 7-legged Diamond-Shaped Diametric.

The “b” leg of our ET formed as an Irregular-B C-Failure Flat. As per NEoWave, Irregular-B C-Failure Flat has larger pattern implication compared to a normal Flat. The “irregular” nature, or “larger” size of its lower-degree b, and the failure of c to move above a, together indicates a larger downward pressure compared to a Normal Flat.

Indeed, as per NEoWave, pattern implication of Irregular-B C-Failure flat is minimum 161.8% magnitude of b, to be projected from the end-point of c. Further, this pattern implication is to be achieved within the time consumed by such a Flat.

As can be seen on the chart below, lower-degree b measured 990 pts from 28478 to 27488. A 161.8% ratio of this would be 1602 pts. Reducing 1602 from end-point of c at 28257 would project 26655. This projection was achieved within the required time, as shown.

The “c” leg of ET was a Zigzag, and its lower-degree b was also an Irregular-B C-Failure Flat. As shown on the following chart, its pattern implication was achieved by the fall :




The “c” leg measured 2355 pts (Nifty 735 pts) in 12 days. Against this, “d” measured 1841 pts (Nifty 596 pts) in 1-2 days. As per “Rule of Similarity & Balance”, 2 waves of the same degree should be 1/3rd in Price or Time

Accordingly, though “d” was substantially smaller in time compared to “c”, price-wise it satisfied the above NEoWave Rule. Therefore, fall from last Thursday’s high of 27743 (Nifty 8598) may either be lower-degree b-leg inside “d” OR “e” leg of the ET/NT.

I
f it is “corrective” phase inside “d”, or “E” of NT, then the current fall could protect last week’s low of 25902 (Nifty 8002). NT could even see “E” achieving equality with “A”, at about 26600 (Nifty 8230).

However, if the fall is “e” leg of ET, then “e” should be “larger” than “c”, as expected inside an “Expanding” Triangle.

The “e” leg would turn “larger” than “c” below 25400 (Nifty 7860), which is a level exactly inside our month-long downside target of 25000-500 we marked on 30th Sep’16.

On one higher degree, ET forming from Sep’16 is “E” leg of the larger Neutral Triangle from Mar’15.

We had argued that major top usually consists of broader market losing more than the mainline Indexes. As can be seen on the following chart, both Small-Cap and Mid-Cap Indexes have lost more than the Sensex, especially after 4th Nov’16.






Remember, even before we opened the downside structural implications, we saw Index topping out on 8th Sep’16 exactly at upper of the Blue channel shown on the Daily chart. As per NEoWave, all Complex Corrective developments get contained in a channel.

T
hereafter, Index broke the 0-x line, we showed in Yellow color, on 26th Sep. The heavy drop on 29th Sep, when we ended “D” as per Black labels, broke the lower end of the Blue channel

A
fter 6 consecutive Bull candles on its Monthly chart till ‘Aug, Index formed a Bear candle for ‘Sep. Remember, 6 consecutive Bull candle is a record since the year ‘2008, and therefore, it indicated an “overstretched” situation, especially because the Nifty PE Ratio had reached “Bubble Territory”. Major top formation, usually, comprises of larger damage in the broader market. 


As per Dow Theory, the lower top lower bottom formation defines a downtrend, and the downtrend will be assumed intact until Index can reverse it by forming higher top higher bottom.

We also suspected maturity as the “D” leg as it was a Triple Combination Corrective and Index was already forming its 3rd Corrective, which is always the last Corrective of any Complex development involving x-waves. 

We had also argued that a Triple Combination carries pattern implication of 60-70% retracement. We also marked the 60% implication at 25000-500 on the initial Daily chart. On Nifty, 60% retracement level would calculate as 7700-7800.

We, remember, assumed that Index was forming a Neutral Triangle since Mar’15 onwards, as shown on the following chart. If its “D” leg is over, as described above, its last leg “E” would go down

In case of Neutral Triangle, “E” can tend towards “equality” with “A” leg from Mar’15 to Jun’15. If so, then such equality would also calculate levels projecting 25000-500 (Nifty 7700-7800)

Equality of “E” to “A” could be time-wise as well. Since “A” consumed 3 months from Mar’15 to Jun’15, “E” could complete by Dec’16, i.e. in 3 months.

We also warned of maturity because the Nifty PE Ratio was into a “Bubble Territory” above 23.50, as was shown on the chart below :




The NEoWave pattern implication for Triple is 60-70% retracement. So, if 8-monh long “D” leg from Feb’16 (22495/6826) to Sep’16 (29077/8969) is completed, then Index can drop to at least 25000-500 (Nifty 7700-7800) levels, which is around 60% retracement level to “D” leg.

Remember, last year we had used this pattern implication to predict Sensex could come down to 22500, and this year, Index hit the level exactly.

Z
igzag is the most severe a pattern. Flat is considered a pattern with lesser severity compared to Zigzag. However, Triangle is the least severe of all Corrective patterns. 

That is why, under NEoWave, a Complex Corrective development, involving x-waves, usually ends with a Triangle in the last Corrective position.

Inside the larger development from Feb’16, which we considered as “D” leg, we marked a “Diamond-Shaped Diametric” in the 1st Corrective, and a Flat in the “x-wave”. The x-wave finished at the Brexit low on 24th Jun, and we had opened an upward 2nd Corrective thereafter.

We saw that high crossed the top of “B” (Jul’15 high of 28578) marginally. Remember, Nifty had already crossed “B” much earlier on 27th Jul’15. Now Sensex has also followed.


Due to this, the A-B-C-D development from Mar’15 last year is now assumed as a “Neutral” Triangle, instead of “Running Expanding” Triangle we assumed earlier. 

Remember, structurally we had already suspected that the development from last year’s high of 30025 (Nifty 9119) could be an Expanding or Neutral Triangle

We, then, opened the “D” leg of this pattern from Feb’16, i.e. from our last year’s target level of 22500 (30000 less 25%). 

As we explained, if the Sensex actually moves above the top of “B”, then the larger structure from Mar’15 could convert from “Running Expanding Triangle” to “Irregular Expanding Triangle” or “Neutral Triangle”.

We, remember, have already marked 5-legged Triangle since Mar’15, and observed that “C” was 161.8% of “A”. The current development from Feb’16 onwards was marked as “D” leg, which is almost 261.8% of “B” leg.

The “Irregular” variation of Expanding Triangle could carry implications similar to “Running” variation for its “E” leg. In both variations, the downward “e” could achieve 161.8% to 261.8% ratio with the “A” leg. 

However, in both the variation “E-Failure” cannot be ruled out. Neutral Triangle, however, is a missing variation of Triangle under Orthodox Wave Theory

Imagine, if Contracting Triangle is like 1st Extension Impulse, and Expanding Triangle is like 5th Extension Impulse, then Neutral Triangle would be likened to 3rd Extension Impulse.

N
eutral Triangle, a discovery under NEoWave, is a 5-legged pattern, just like any other Triangle, but its c-leg is biggest (like 3rd Extension), and a-leg and e-leg tend towards equality.


G
oing by this logic, in case of Neutral Triangle, we could see “E” (last leg) to be similar to “A” leg. Remember, “A” leg was 3700-pt down-move from Mar’15 to Jun’15. On Nifty, it was about 1175 pts. by magnitude.

So, if the “D” leg ends above “B”, then we could only see a limited downside similar to “A” leg, as measured above.

In any case, as we observed, the Nifty PE Ratio is into the “Bubble territory” above 23.50. As we argued, although it may spend some time in this territory, it would be wise to remain extremely selective for the time being.

M
arket, at Sensex and Nifty level, is up 27% from its bottom at our last year’s projected downside of 22500 (6825). 

M
ajor upside of about 300% on an average was seen in Sugar stocks. Since these are not normally part of Mutual Fund portfolio, MF holders may have seen limited or flat returns.

S
ensex closed Jul’16 at 28052, against 28115 level it close 1 year ago in Jul’15. Since MFs’ focus is usually on front-line stocks, NAVs could be flat. This is just to emphasize that market has been selective and even tricky.

Having rallied 25-27%, the valuations are very close to Bubble Territory as shown by the Nifty-50 PE Ratio chart we follow. This, remember, is an official NSE data. We mostly follow the NSE data in this regard as BSE data (shown elsewhere in the report) was found technically undependable.


In any case, last time we used this chart was during Jan-Mar’15 period, when the PE Ratio had reached the Bubble territory above 23.50. Sensex shaved off 25% from 30K levels to our target of 22500.

This is not to say that market has peaked already, but it is not in the safe territory for “investors”. One should, therefore, chose stocks and sectors more carefully.


Also observe the 2-year cycle of tops and bottoms on the Monthly chart of Sensex shown below. Since 1980’s, this cycle shows Index turning every alternate ‘March.



As can be seen on the chart below, most of the recent bottoms were confirmed with a higher bottom formation, which, however, retraced the initial rally from the bottom by about 60-80%.

Just before a big rally, remember, Index usually absorbs all the negativity at such a higher bottom.



Overall, we mentioned that the levels of 21300-22500 are crucial on downside because it was the NEoWave “pattern implication” of 60%-70% retracement to the 19-month Triple Combination rally from Aug’13 to Mar’15, as was shown on the following chart. Index did respect the pattern implication and rallied 25%.

The strong bounce came exactly from our last year’s target of 22500. This level was imprinted on the mind of the players, and they played it.

This level, remember, was 60% pattern implication for the 19-month long Triple Combination rally from 17449 (Aug’13) to 30025 (Mar’15). The 60% calculated to 22479, and Sensex bounced from 22495. We printed 22500.

However, Index could now be under the influence 8-year cycle of losing 50-60%, and has broken its yearly trajectory since ‘2012 (refer to relevant chart shown elsewhere in this report).

Under the circumstances, failure to base out, holding 21300-22500 (Nifty 6350-6750), i.e. the 60-70% pattern implication area, could result in an Oct’08 like situation. Budget needs to create a dramatic +ve sentiment to avoid such an eventuality, else …

Over a year ago, we showed performance of Sensex post elections on the chart given below. As shown on the chart, Sensex’ performance always remained subdued after non-Congress Govt gets elected.




As we argued, anytime the Sensex dips below 25K during ‘2016, it would break its Yearly Trajectory. Break of the trajectory could have implications for the coming year. Structurally, it would raise the possibility of the current corrective phase from Mar’15 stretching to 13 months till Apr’16.

Remember, Sensex was also testing the crucial Monthly Base line we showed on the following ch
art, and the same has been broken. Post-Feb’16 rally looks like a “pull-back” to the broken line, from where Index is currently reacting lower.




Prior to ‘2013, there were two major corrective phases, first during Jan’08 to Mar’09 and second Nov’10 to Dec’11, and both lasted for 13 months, another Fibonacci Number. 

Based on these historical numbers for major corrective phases time-wise, it is possible that if the current phase stretches beyond Nov’15, i.e. 8 months, then it can extend to Apr’16, i.e. continue for 13 months.

Last time FIIs sold out was during Oct’07 to Mar’09, when the Index shaved off as much as 63%. FIIs invested Rs.612000 crs after Mar’09, but Dollex-30 showed un-impressive gains during this period, as it is still below its ‘2008 highs.

Late last year, we expected market to hit a major top during January of this year, based on “January-Topping cycle”.

As we showed on the following chart, except during ‘2006, all the major and minor tops on Sensex occurred in the first quarter of every Calendar Year, for 15 years since ‘2000.



We also pointed out that market has seen major corrections or profit-booking modes every 2 years ever since ‘2004. 

Except during ‘2013, when Sensex corrected only 13%, all other corrections saw cuts of either 25-35% (like during ‘2004, ‘2006 and ‘2010) or 50-60% (like during ‘2008)
.

The last major profit-booking was during ‘2013, and in ‘2015, 2-year cycle of profit-booking was due.



We have been cautioning investors since the beginning of ‘2015 also because Index had achieved breakout implication of 5-year Ascending Triangle from ‘2008 to ‘2013, we showed on the following chart.

The largest leg of the Ascending Triangle was the fall of ‘2008-09, i.e. about 13000 Sensex points
. As per NEoWave, the normal thrust implication out of a Triangle is 100% of the largest leg of the Triangle.


From Aug’13, when the Ascending Triangle got over, Sensex has moved up almost exactly 13000 pts from 17449 to 30025 :




The Sensex top at 30K levels was exactly the Grid level as per VP’s Grid Levels System (GLS), which we have been using since last 5 years. 



It was also pointed out that Index looked “overstretched” after rallying for 12 quarters, which was a situation similar to major top of ‘2008.



The 22500 level is also close to previous major tops of ‘2008 & ‘2010, and is also the lowest level of “Sensex Trajectory” we showed since beginning of this year. It is also value of the line joining ‘2003 & ‘2009 bottoms on Yearly chart of Sensex :



The likely Sensex trajectory for the year ‘2015 could be provided by the channel shown on the Yearly chart above.

As we saw previously during ‘1988 to ‘1994, and again from ‘2003 to ‘2007, Sensex’ bull phase trajectory is usually contained in 2 parallel lines roughly. Sensex, in the past, maintained its trajectory for 5 years or 7 years, before breaking it.

The current trajectory began from ‘2012, and ‘2015 would be 4th year in this trajectory, which could break either during ‘2017 or ‘2019, if the past is any indication.

F
or the year ‘2015, the trajectory projects 32800 on the upside and 22800 on the downside.


For ‘2016, however, the lower line is at 25500 as marked.

The current trajectory is at a lower angle (about 30 degrees), as compared to previous 2 trajectories of 1988-94 and 2003-2007. The angle of ascent for both was identical at 60 degrees. The lower angle of current trajectory has been despite heavy FII Inflows and political change.


Technical readings carried forward from previous weeks

The disparity between Sensex and broader market was shown on the comparative chart below.

The broader market outperformed Sensex from Nov’13 onwards, and its out-performance was especially significant from 16th May onwards, the day of Election Results, as can be seen on the chart.




We considered post-Aug’13 development to be F leg of a larger Diametric formation from ‘2008 onwards as shown on the chart below.



This long-term scenario marking the larger Diametric was published on 6th Feb’12. This Diametric assumption, as was argued, compared well with the 11-year Diametric formation previously seen during ‘1992 to ‘2003.

As shown on the chart above, F is the “Expanding” leg of the 7-legged Diametric from ‘2008. In the previous instance of the Diametric during ‘1992-’2003 period, F leg had hit new highs during ‘2000.


In other words, F leg of the diametric making new highs is nothing new. After hitting new highs during ‘2000, G leg went down till ‘2003.

We argued for a Diametric development from ‘2008 onwards because we observed time-similarity within its legs, which is symptomatic of such a pattern. So far, most of the legs, except B and D, have consumed exactly about 13 months.

On the monthly Close-only chart given below, one can see Sensex crossing previous highs, indeed taking their support for reaching further newer highs for the F leg
:




We may watch if Sensex shows maturity signs at current levels and starts cracking.

We considered this alternate scenario when Sensex moved above 2008-10 highs. It shows corrective phase from ‘2008 completing as a 5-legged Ascending Triangle. This scenario can open much higher targets, 30000+ for Sensex.




The 30000+ target is nothing but 100% (+/- 25%) breakout implication of the largest leg of the Triangle.

A
ccording to NEoWave, corrective phase should consume more time than the move it is correcting. After the 56-month rally from May‘2003 to Jan’2008, Sensex has corrected for 67 month from Jan’2008 to Aug-13, i.e. a larger period as required under NEoWave. 


We cannot rule out that a sufficient time-correction is required after any multi-fold rally. As shown below, such time correction can last for as much as 161.8% to 261.8% time ratio to the multi-fold rally.

As for the last multi-fold rally during ‘1988 to ‘1992, its correction lasted for 262.8% time ratio, from ‘1992 to ‘2003.




We argued in favor of long term consolidation phase beginning ‘2008 because 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, even moves reaching new highs are considered its internal part, and not as breakouts.

As we noted, after 11-fold rally during ‘1988 to ‘1992, Sensex consolidated for 11 years till ‘2003 (261.8% time ratio). Within this consolidation, Sensex corrected as much as 30-60% every time it came closer to previous highs or even after hitting new highs

A
n 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 correcting the preceding 11-fold rally from ‘1988 to ‘1992.




On the super-cycle degree, we are considering a “Terminal” development since ‘2003 onwards. The Terminal was suspected because its 1st wave from 2003-2008 was a label-3 “corrective” pattern. (As against a normal label-5 Impulse pattern).

The 2003-2008 rally was internally marked as a corrective pattern called a Running Diametric


Also, more importantly, it is 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 our assumed F leg continues beyond 13 months, i.e. beyond Jul-Aug of this year, then we could be forced to consider the current up-move as the 3rd of the Terminal Impulse, as per the Green labels shown above.

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, remember, 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).

T
he question, therefore, is whether the corrective phase ended as a 5-legged Triangle in Aug’13, OR it would continue for 2 more legs and form as 7-legged Diametric.

As was shown on the chart below, all the up-down legs from Jan’13 to Aug’13, except “b”, consumed exactly 20-25 days, and formed into a 7-legged Diametric (Diamond-Shaped variety).




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.

S
imilar to the pattern explained above, on one higher degree, we also observed time-similarity from ‘2008. All the legs, except “b”, consumed about 13 months since the year ‘2008.


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 continuing beyond Jul-Aug of this year.

T
he 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.

Not related to Wave Labels so much on an immediate basis, VP’s 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. 


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.