Weekly Technical Analysis
March 20, 2017
- By Vivek Patil, India's foremost expert in Elliot Wave Analysis
 
Top Stories of the Week


  • Sensex up 2.4%, forms a gap-up Bull candle on Weekly.

  • Nifty hits a new all-time high.

  • Advance Tax mop-up rises only 6% in Q4.

  • Yogi Adityanath becomes UP CM, Manohar Parikar Goa CM.

  • 3-fold jump in criminal prosecution by tax authorities till 'Jan.

  • Retail Inflation rises to 3.65% in 'Feb.

  • Exports jump 17.5% in 'Feb.

  • India Inc's dividend payout at record high.

  • RBI mulling criminal action against bank defaulters.


"g" hits our TG of a new high on Nifty, even as Nifty PE Ration enters "Bubble Territory"


[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 is expected to start gap-up above 11-day range. The move would look like a breakout … corrective phase looks like ‘f’ leg … This would make breakout from the range as ‘g’ leg of the larger Diametric we assumed for the UP-move from Dec’16 onwards … we targeted 30500 (Nifty 9500) … the question is whether ‘g’ would lead to a major top … most of the major tops occurred in the 1st Quarter … the upward ‘g’ leg may continue as long as the bias continues +ve … ”

Sensex did open with a huge gap-up on Tuesday
after the 3-day weekend on NDA winning in UP election. After a brief pause on Wednesday, it traded higher for the week, and settled 703 pts or 2.4% higher for the week. The action formed as Bull candle on the Weekly chart with a gap-up below its bottom. All sectors ended +ve, but the Realty/FMCG/Capital Goods Indexes added between 4-5.5% each.




A Weekly gap-up is a +ve sign, suggesting Bulls are in control.

Sensex is in an UP-trend, maintaining higher top and higher bottom formation since Dec’16, which is roughly enclosed inside the Yellow-color channel. The UP-trend, as per Dow Theory, would continue as long as Index maintains the rising channel.

Due to lack of “standard” correctives inside the rally, we suspected that the rally could be a 7-legged Running Diametric pattern, marked internally as a-b-c-d-e-f-g.

Last week we expected Index to open with a gap-up, and the breakout-like action was suspected to be the “g” leg
of the Diametric, which is the last leg of any Diametric.

When Index is into the last leg of an upward pattern, further buying should be selective
with limited perspective. Also, we should be looking for signs of maturity. Such a maturity would suggest not only end of “g” leg, but also end of the larger Diametric from Dec’16.




As we showed on the chart above, the valuations, in terms of Nifty PE Ratio have entered the “Bubble Territory” we consider above 23.50. Already at 23.78 on Friday, market generally remains into the Bubble Territory for 1-4 months.

Last year, we used this concept to identify a major top during Sep’16, when the PE Ratio had entered the Bubble Territory. As can be seen on the chart, the PE Ratio later came down to 21.16 by Dec’16. The Sensex itself lost about 12%, and many individual stocks saw a larger damage.

Based on the history of tops, we also observed that major tops are generally made in the 1st quarter of a Calendar Year. The fact can be checked on the following chart which shows that except during ‘2006 and ‘2016, all major tops were indeed made in the 1st Quarter.




Though we considered last week’s up-move as “g” leg, it has so far consumed only 4 days. Previous upward legs, “a”, “c” and “e” legs consumed anything between 6 to 16 days. So, it appears “g” may not end in a hurry.

However, this does not prevent “g” leg getting sub-divided. The pattern inside “g” is not clear as yet. But in case the Index steps back after rallying last week, such a pause could be marked lower-degree b-leg inside “g”.

Friday’s action formed as Counter Attack Bear (CAB) candle, comprising profit-booking at higher levels
, as investors took advantage of higher open. Friday ended with marginal gain only due to ITC’s 5% up-tick. Market, thus, is suggesting its “selective” turn.

For Sensex, Friday’s high was just 200 pts short of a new high
, its previous high being 30025, which was hit during Mar’15. Remember, after turning +ve from Dec’16 onwards, we targeted a new high, and Nifty achieved it last week.




Current highs are already inside “tolerance” allowed under NEoWave to our targets at 30500 (Nifty 9500). This target, remember, was based on the pattern implication for breakout from a 21-month Neutral Triangle from Mar’15 to Dec’16 we showed on the chart above.

Friday’s CAB formation can have -ve implications on follow-up weakness & close below its bottom. Preventing close below Friday’s CAB can attract +ve efforts from the Bulls, who may continue their “buy on dips”.

In case Index does weaken/close below Friday’s CAB, it could indicate that “g” is getting sub-divided. Any corrective to last week’s rally would be initially marked as lower-degree b-leg inside “g”.

It would only when Index starts retracing it rising segments in faster time, breaking the Yellow channel, and forming lower top lower bottom below the channel, that we can confidently say that the Diametric rally is over


If any correction from here continues to maintain the Yellow rising channel, it could be marked as an x-wave, after which 2nd Corrective can develop upward. Else, the rally will be assumed as over. We’ll watch accordingly.

________________________________________________________________________________


Since Dec’16, all bottoms have been higher, and all tops have also been higher. We argued that “higher top higher bottom” defines an UP-trend, and all dips would only provide “buy on dips” opportunities

Due to the substandard “b” leg, we had assumed the rally may be forming as a 7-legged “Diamond-Shaped” Diametric, marked internally as a-b-c-d-e-f-g. 

T
riangle, Terminal & Diametric patterns are special patterns, exceptions to virtually all NEoWave Rules, and therefore, perfect application of rules can only be desired.


R
ally from Dec’16 had already crossed the 61.8% retracement level to the preceding fall from Sep’16 to Dec’16. The rally, therefore, was considered as a new up-move, the final confirmation of which required “faster” retracement of the preceding fall from Sep’16 to Dec’16.

B
y NEoWave, faster retracement of the last segment of a structure confirms that the structure is complete, and another structure in an opposite direction, i.e. upwards, has opened.

The NEoWave pattern implication for the move out of a Neutral Triangle would 75% of its largest leg. Since “D” was its largest leg, we calculated 30500 (Nifty 9500), or a new high, as the upside possibility.

Earlier on 30th Sep’16, we projected “E” leg to go down and end near 25000-500 (Nifty 7700-7800) levels during Dec’16. News about Trump victory and Demonetization came later, during Nov’16, and it only helped “E” to move closer to our downside target.

The “E” leg ended at 25718 (Nifty 7894) exactly in Dec’16. While the time target came through perfectly, price-wise we considered it to be inside 1-3% tolerance level allowed under NEoWave. We, accordingly, turned +ve from Dec’16 onwards.

A
s can be seen on the following chart, Index showed a “Double Bottom” during Nov-Dec’16 and later achieved its upward projection based on the “height” of the pattern.

After flattening for 2 months, as we had argued for, the 200-day EMA has now turned +ve, and indeed provided support for the “b” leg dip during Jan’17. Index also crossed the 61.8% mark to preceding fall to suggest the rally could be a new up-move.




Index has reversed after achieving downside technical targets, time-wise (Dec’16) as well as price-wise (25000-500), almost exactly. 

Here we take the opportunity to highlight the importance of Technical Analysis, especially the NEoWave Analysis, in forecasting the market action. Fundamentally-oriented players found it difficult to turn +ve after Trump victory and Demonetization.


Index showed a Head & Shoulders formation at its Sep’16 top, and our downside target also achieved the downside projected on the basis of its “height” of the H&S formation.

I
ndex came down to 25718 (Nifty 7894) in Nov-Dec’16, which was inside 1-3% tolerance level allowed under NEoWave, We, therefore, turned +ve and opened upsides with crucial upside at 61.8% retracement level at about 27800 (Nifty 8560).

As we mentioned, the 61.8% level was also close to (1) “Neckline” of the Head & shoulders formation (2) “Double Bottom” height projection and (3) “Turbulence” area of 9-11 Nov’16 on Trump victory & demonetization. We wondered if the rally would be a new up-move OR just an x-wave. To decide on this, we considered 61.8% levels as crucial.

The bottoms made during Nov-Dec’16 were similar, i.e. 25718 & 25754 (7916 & 7894 on Nifty), and therefore, they looked like a “Double Bottom”, which is a reversal formation as per conventional Technical Analysis.

The high between these 2 bottoms, i.e. high of 9th Dec at 26804 (Nifty 8275), was crossed in Jan’16, which is a conventional method to confirm a “Double Bottom”. The height of such a Double Bottom can be projected as possible upside, and same would also calculate to levels similar to 27800 (Nifty 8560), close to the 61.8% level marked on the charts.

The 61.8% level is also close to Neckline of Head & Shoulder formation we had marked as Sep’16 top reversal formation. Index, remember, broke this Neckline in Nov’16, and achieved downside projected on the basis of height of the H&S formation.

The 61.8% level is also close to the high of 10th Nov’16 at 27743 (Nifty 8598), where Index went into a huge “Turmoil” immediately after the Trump Victory and Demonetization. Remember, Index lost 1685 pts overnight on these news flows, recovered 1835 pts by 10th Nov, only to drop to a new low thereafter.

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

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 new year ‘2017. 


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.

Currently, Sensex testing the “Pull-Back” level of the Yearly Trajectory we showed at 29000.




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”.

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 :




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 :



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.


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.



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.




Remember, Sensex was also testing the crucial Monthly Base line we showed on the following chart, 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.

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.




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.