08 Feb 2010
- By Vivek Patil, India's foremost expert in Elliot Wave
Analysis
Top Stories of the Week
a.. Sensex loses further 2.7%, achieves equality with Oct'09
fall.
b.. Dow/FTSE/Sensex touching their respective 200-day EMA
levels.
c.. Strength in Dollar puts pressure on other asset classes.
d.. NTPC FPO bares scrapes through on the back of
institutional support.
Choice stands between "Common" v/s "Elongated" Flat
Last week, it was contended that "The Weekly candle carries a
lower shadow indicating supportive efforts near 16K level . 16K mark
was actually the Aug'09 high on Sensex. All previous tops are
important technical levels. Holding 16K, therefore, can be considered
positive . Sensex has seen a continuous drop for 8 days . Short term
oscillators do reach oversold zones within 8 days . positive scenario
holding 16K would have potential to test 16577 or 17000-25 . Failure
to hold 16K, on the other hand, could test 15600. "
Sensex initially held the 16K mark, and recovered to 16553 by
Wednesday. That almost touched our first upside potential target.
Reversing from there, Index broke 16K to touch 15725, which was close
to the downside potential mentioned as 15600.
While Sensex lost 2.7% for the week, Realty and Bank Indexes
shaved off 4 to 5%. Stock-wise, Titan Ind. proved the biggest gainer,
but 3/4th of all pivotals ended lower.
The action formed a sizable bear candle for the week. However,
having lost about 2000 points (from 17790 to 15725) over the last 21
days, the levels of 15600-700 do achieve equality with the previous
fall seen during Oct'09 (from 17493 to 15331).
Such an equality can attract efforts to hold 15600-700 levels.
Remember, the 15600 is also the top the Sensex made during Jun'09. It
is also the value of the 200-day EMA on the Daily chart. We'll,
therefore, mark 15600 as crucial for the time being.
Last week's low at 15725 measures as 2065-point or 12% cut from
6th Jan high of 17790. As I argued previously, "History has shown a
minimum cut of 5.5% from initial highs during every 'Jan." The 12%
drop meets the requirement of this anniversary cycle.
Holding 15600-700 would have upside potential to test the
falling channel shown on the Daily chart. Decisive break of the
channel, followed by strength above 16553 would make the medium term
scenario turn positive.
That's because, as at 15600-700, the a-b-c structure since 'Oct
high of 17493 stands as a "Common" Flat.
Below 15600 (and 15331), it could turn into an Elongated Flat
with an oversized "c" leg, falling into implications of 2-year cycle
explained previously. Watch if the 15600-331 fails to hold. Such a
failure could turn the current fall into an oversized "c" of an
Elongated Flat.
A "normal" cut inside post-Mar'09 phase has been about 2000-2500
points lasting for 3 to 5 weeks. Remember, the 1st one was from 15600
to 13220 (lasting 5 weeks) and the 2nd from 17493 to 15331 (lasting 3
weeks).
The 15300 level by Feb'10 was, accordingly, marked as crucial.
Any fall below 15300 lasting beyond 'Feb would be termed out of sync
with the normal rhythm of this phase.
This contention can be checked on the chart below. The time
rhythm during post-Jan'08 fall had showed Sensex dropping for about 10
weeks, with an average 7 weeks of intervening segments of rally.
For the current rally post-Mar'09, the time rhythm shows rallies
lasting about 13 weeks, with 3-5 weeks of intervening drops.
[Technical readings carried forward from previous weeks are
shown in italics. Readers can easily identify the new arguments given
in regular font]
Wave-count-wise, downside holding above 15331 can be marked
either as "x" (as shown on the opening chart), OR as "f" as per the
alternative structure presented on the chart above.
As for the price-structure of this rally, I pointed out that
"each subsequent rallying segment has been 55% of the previous
rallying segment. It indicates loss of bull-power, despite hitting
newer highs of the larger rally." As presented, "e" was 55% of "c" and
"c" was 55% of "a".
The non-directional segments, i.e. "b" and "d", area almost
equal price-wise as well as time-wise. The up-move since Mar'09 is,
therefore, marked as a possible Diametric as shown by this alternate
assumption.
The current drop from Jan'10 high of 17780 becomes its "f" leg,
after which, the last leg, i.e. "g" leg, would develop upwards,
preferably reaching levels higher than 17780 (even 22000), if it is
not a Failure leg.
The "f" leg may or may not hold the low of "d" at 15331. That is
because Bow-Tie Diametric (as marked above) combines two Triangles,
Contracting (first half), followed by Expanding (latter half).
The "g" leg can be a Failure leg, wherein the development over
the last 11 months would be seen as a Rounding Top formation.
Structurally, by both the alternate structures, larger rally
since Mar'09 continues to be marked as a "B" wave against the 14-month
fall from Jan'08 considered as the "A" leg.
In Triangles, as I pointed out earlier, "B" leg can consume
lesser time than "A". As per the 1st alternative, "B" finished at
17493 in Oct'09, i.e. in 7 months since Mar'09.
The 1st alternative, the preferred one, would suggest a 3-5 year
long Triangle formation from Jan'08. "C" has already been forming for
downward targets of 13500 (Gap-up of May08) / 11850 (60% correction
level) / 10600 (80% correction level).
[Remember, we continued to mark the move post-15331 as a "b"
leg, because time-wise, wave-b of a Flat can be 5-7 times than wave-a,
only beyond which it would have become suspicious.]
As per the 2nd alternative, the Diametric "B" leg will finish
when one lower degree "g" leg is over.
{The "B" leg of a Triangle can form as a 3-legged pattern
(Zigzag or Flat) or as a 7-legged pattern called Diametric. We cannot
mark "B" as a 5-legged pattern, i.e. Triangle.]
The most bullish option (the 3rd option) would be marking the a-
b-c Flat from 17493 (Oct'09 high) as an intervening "x" wave in
between two Diametric formations. However, this option can confirm
when we see a faster retracement above 17790.
Despite the best efforts, if Sensex cannot hold on to the 15331
level by Feb'10, our 1st alternative would be in works.
Failure to cover the falling gap of 22nd Jan, at 17000-25, could
provide an advance indication of weakness (and that too, at a higher
level).
The 1st alternative also brings in the implications of 2-year
cycle, described elsewhere in this Report, which would indicate a
major top having been formed already near the revised target level of
17500, as shown on the Chartacle.
Going by my 6-month old arguments : (1) the PE ratio is touching
maturity level under normal conditions of the market (2) Sensex has
doubled from its bottom levels (3) the main buying force, i.e. FII
investment, has been generating reducing returns (4) Daily Oscillators
are on -ve Divergence (5) Weekly Oscillators are in negative mode.
These arguments have ensured that whatever euphoria we saw in
the market was limited only to select individual stocks. Sensex itself
has been oscillating around 16000 level for last eight months since
Jun'08.
If we see bullish alternatives taking over, the current rally
would still be labeled as the "b" leg of the multi-year larger
Diametric structure from Jan'2008, just like the large consolidation
we saw from '1992 to '2003.
Above 17800, such a scenario would create a bubble-like
situation in terms of valuation (PE Ratio). My earlier Chartacle (of
24th July), which provided guidelines for the last six months, will
accordingly need to be modified for upsides targets of 17735 / 18100 /
18450 / 18900 before it reaches 22000.
As can be seen on the Monthly chart of Sensex given below, the
current rally has a questionable base-line.
All previous rallies on Sensex maintained the base-line, break
below which led to a sizable price-time correction. The '2009 rally,
therefore, turns out to be unique in nature, somehow holding higher so
far.
Going by historical examples of base-lines, benefit of doubt may
be extended till the 3rd change in the base-line, holding which,
Sensex could still move higher towards 22000 levels (as "b" becomes
part of a Diametric instead of Triangle, as explained elsewhere).
The 'Jan/Feb candles are completely below the 2nd line, and
therefore, unless it immediately pushes above it, it would face danger
of dropping to the 3rd line.
However, break below 3rd such base-line should signal end of the
"B" leg, whenever that happens. Example of the rule of "3" is shown on
the Monthly chart of Dow below :
A time-consuming "b" wave (as assumed for the post-15331 move as
per the preferred scenario presented on the opening chart) can
generate an oversized "c" wave as per an Elongated Flat scenario, like
the one which was seen during '2004.
During '2004, market had shown a rally similar to what was been
during '2009, a 115% gains in eight months.
Sensex had corrected '2004 rally by 60% price-wise in 60% time,
forming like an Elongated Flat, as shown on the following chart :
The following chart compares last two rallies out of major
downswings (which saw near-60% erosion in valuation), during '2003 and
'2009. Both rallies are similar in terms of the time consumed and
gains registered, both gaining about 115% in about 8 months.
On its maturity, the '2003 rally got retraced by 60% in 60%
time, dropping to 4227 before the next move. If the current rally
matures at the current levels, it could also show a 60% retracement
(11850) by March'2010.
As I have saying, "Will the history repeat itself ? Whether this
happens or not, we need to be cautious on this front." Sensex, down
2000 points, the caution has certainly paid off.
The 1st quarter of every 2nd year has proved a turning point on
Sensex'. Beginning Jan'1980, most of the turning points can be seen
occurring during Jan-Mar period of an even year, as marked on the
chart.
We are now in the 1st quarter of '2010, which is an even year,
therefore, at a turning point as per this 2-year cycle.
After showing falling volumes since 18th May, On Balance Volume
(OBV) chart had shown a positive break above the Yellow resistance
line.
OBV's critical Red line for the latest period was broken last
week, which is a bearish indication.
Sensex maturing near 17500 would support my argument that market
usually corrects after doubling. Ratio of 200% can be seen even for
all the first rallies coming out of bear phases :
- After a 24-month bear phase during 1986-88, Sensex doubled
from 390 to 798 and went into sideways consolidation for about a year
before moving further up.
- After a 13-month bear phase during 1992-93, Sensex doubled
from 1980 to 4643 and went into sideways consolidation for about four
years before IT bubble happened in 2000.
- After a 39-month bear phase during 2000-03, Sensex doubled
from 2904 to 6250 and saw a quick 60% retracement before resuming the
bull phase.
Remember, 17500 is about twice the value of Oct'08 low of 7697
or 'Mar low of 8047.
I also explained my PE Ratio argument previously. I argued, "At
its highest level of 15600 on Sensex, PE Ratio had reached 21+, which
is near the maximum figure of 22 seen under 'normal' circumstances.
Only bubbles can push it higher towards 28. Such bubbles happened
during '2000 and '2008, which were 8-year cycle tops. It takes 8 years
to build a bubble. Bubbles have never been seen in two consecutive
years." Currently, as of this Friday, the PE ratio is at 20.35
(against 21 last Friday).
Previously, I assumed end of Triple Combination since Jan'2008,
finishing at 8867 (20th Mar'09). Since Triple Combinations can occur
only as a largest leg of Triangle, I contended that "we may be into
the next upward wave, 'b' wave, which could correct the 14-month long
Triple Combination by as much as 50%." Under Neo-wave Theory, 70% is
the pattern implication for any Triple Combination.
However, I said "In Triangles, one can only have guesstimates.
Triangles are exception to virtually all rules . As a general rule,
one can say that 3 out of 4 retracing legs of a Triangle would retrace
a "minimum" of 50%. (This ratio was, accordingly, used for projecting
14500 earlier).
The rally from Mar'09 did an exact 70% retracement to 14-moth
fall. If the Sensex moves decisively beyond 17500, then the "b" leg
can even travel further up, perhaps testing Sensex' 2008'highs.
In such a case, Sensex will go into a longer consolidation,
lasting a decade or more, (similar to its consolidation seen during
'1992 to '2003), though at a higher range contained within equidistant
the parallel channel drawn for 1992-2003 period, and shown elsewhere
(in Yellow color on a monthly chart).
The current "b" leg, in such a case, would become "b" of much
larger Diametric (instead of "b" of Triangle I've assumed currently).
Since "A" leg consumed about 14-15 months since Jan'08, the
entire Triangle, consisting of five legs, could consume 3 to 5 years,
beginning '2008.
Whether the move post-Jan;08 develops as a Triangle or
Diametric, our trading/investment strategies should be designed
accordingly over the next 2-3 years.
The suspected 3 to 5-year Triangle OR 10-year-long Diametric on
Sensex would be the 2nd wave within the larger 5th wave. This 5th wave
could be forming as a Terminal. Terminal confirms when the Sensex
drops below the 2-4 line of one higher degree. One may see the last
chart of this Report (Yearly chart), which shows the 2-4 line and its
values for the next three years.
Remember, Terminal development usually violates the 2-4 line,
and Triangle in the 2nd wave position is allowed only inside a
Terminal Impulse (and not in a normal impulse).
The yearly channel, which I used earlier to project 20000 level
for the Sensex during '2007, was broken when the Index moved below
17200. Break of this long-term channel also weighed in favor of the
larger corrective phase as per 8-year cycle.
The current rally appears stalling near the breakdown level at
17200.
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. Index
achieved the forecast price/time targets.
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.
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 scenario, a Diametric developed into the
1st of the 5th leg. 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].
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.
However, the Sensex sustaining well above 13300, may lead to a
"Double Extension" scenario, wherein both 3rd as well as 5th would be
extended waves.
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 development from 2003 to 2008 could be taken as
the 1st of the 5th, which, due to corrective structure in 1st leg,
could be developing as a Terminal. We may be into its 2nd wave, since
'2008, which, 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.
If 5th proves to be a Terminal, the larger label of 3rd will
have to change to 5th, because only a 5th of the 5th can be a
Terminal. The 1st and 3rd shown, would then change to 3rd and 4th.
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