Top Stories of the Week By Vivek Patil, India's foremost expert in Elliot Wave Analysis
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Sensex loses 1%, forms potential Downward Bar Reversal on weekly chart.
Sales of consumer goods slowed close to 10-year lows.
CBI summons coal block allocations files from PMO.
Onion prices surge to record high of Rs.90 per kg.
CBI registers 8 preliminary enquiries in Radia tape case.
Govt firms up Rs.14000 cr fund infusion plan for PSU banks.
Broking industry stressed, almost 500 stock brokers shut shop this year.
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'Oct rally does 50% in 100% time, watch last week's Low as crucial
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[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, “Compared to the preceding ‘Aug-Sep rally, the current rally appears ‘slower’ … this may open apossibility that the development post Aug’13 is an ‘Extracting Triangle’, a 5-legged pattern with rallies getting smaller and drops bigger. The current rally (from 1st Oct), being slower, could be c-leg inside this development, as per labels marked in White … We may, accordingly, trade with +ve bias, but watch if the rally gradually fizzles out in the next 4 days, and breaks its Grey channel enclosure … after the last buyer gets sucked into, the market is more likely to correct … "
The Sensex cautiously pushed higher in the first 4 days of the week. Up by 156 pts on Thursday morning, however, it wiped off all the gains by Friday, and closed 200 pts or about a percent lower for the week. The rally was seen fizzling out in exactly 4 days as we suspected. While Realty/ FMCG Indexes lost about 2% each, the Capital Goods Index jumped a hefty 5.4% higher. The broader indices like Small-Cap and Mid-Cap outperformed Sensex, and closed a percent higher.
 The action broke the original Grey rising channel, and new channels could be drawn only at lower angle of ascent.
The Weekly candle on Sensex formed as the first Bear candle after three consecutive Bull candles in a row. With Higher High but a Lower Close, the action also formed what is technically known as a Weekly “Downward Bar Reversal” (DBR).
Just to note, Sensex formed such a Weekly DBR patterns at all the tops so far during ‘2013. Though it is a bearish pattern, its -ve implications confirm only if the next Week’s candle weakens and also closes below its Low, i.e. below 20589 (Nifty 6116).
At the top of last week, Sensex touched 21039 level, as compared to its ‘2008 high of 21207 and ‘2010 high of 21109. Indeed, last week’s high was exactly touching the resistance line joining ‘2008 and ‘2010 highs on the Weekly/Monthly charts.
Unless the action from here takes out ‘2008 and ‘2010 highs, it can be said that technically Sensex is testing a crucial level, and therefore, needs to be watched more carefully from the perspective of a “suckers rally”.
As we observed since two weeks, the ‘Oct rally has been “slower” compared to the preceding rally during Aug-Sep. Time-wise, both continued for 15 days, as it looks till now. However, the ‘Oct rally could achieve only 50% magnitude, as compared to the Aug-Sep rally.
Due to “slower” nature of the ‘Oct rally, it was suspected to be a “distribution” move. Such a move is usually expected to be choppy, stock-sector specific.
Such a slower rally is an indication that Bulls may be tiring out. Structurally, we suspected the development from Aug-13 onwards is an “x”, either developing as a Complex Corrective comprising two correctives OR alternatively developing as 5-legged Extracting Triangle.
An “Extracting Triangle” is a 5-legged pattern with rallies getting smaller and drops bigger. The ‘Oct rally, being slower, could be c-leg inside this development, as per labels marked in White color on the initial Daily chart. Its yet not clear if the c-leg is over.
Extracting Triangle formation confirms if c-leg remains smaller than a-leg, and thereafter d-leg turns bigger than the b-leg. The e-leg coming next would be its last leg, and faster downside retracement of the e-leg would confirm the end of the Extracting Triangle.
By conventional Technical Analysis, an Extracting Triangle would be seen as a Head & shoulders top reversal formation, with its Head at the top of c-leg, and Neckline near the bottoms of b and d legs.
An extracting triangle could also be seen as a “distribution” pattern. It shows bulls losing power gradually as they are able to form only “smaller” rallies, and are confronted with “bigger” drops. [e < c < a and d > b].
All the internal drops inside the ‘Oct rally measured exactly 375-400 Sensex pts (110-125 Nifty pts). A larger drop would indicate bears getting more powerful. The latest drop from Thursday’s high of 21039 (6252) to Friday’s low of 20622, is already seen as a drop bigger than 400 pts.
The ‘Oct rally having completed a similar time as a-leg (Aug-Sep rally), i.e. 15 days, and having achieved only 50% magnitude in comparison, we’ll watch for further -ve confirmations to end the c-leg and open the d-leg downwards.
The larger question to ask would be if the last buyer has bought into. Top cannot form until he has. In order to suck in the last buyer, NEoWave does not rule out tricky trade, including a “suckers rally”, at the top under its “Exception Rule”. We may watch out for that.
In the last three days, ever since the majority opinion expected Sensex to take out its previous ‘2008-10 highs, the A/D ratio has been -ve, suggesting profit-booking in individual stocks and sectors.
The rising Grey channel is broken, but a Lower Top Lower Bottom forming on the Daily Close-Only chart below the channel is still awaited as further -ve sign, which would indicate a falling structure as per Dow theory.
All in all, it appears that for the Settlement’s Expiry week beginning today, last week’s Low of 20589 (Nifty 6116) could be considered as a crucial level to begin with. Holding it could maintain +ve options. The -ve options can open otherwise. Watch it on “closing” basis.
While +ve options would mean continuation of c-leg of Extracting Triangle, -ve options could indicate its downward d-leg. Whether “x” from Aug’13 can be finally marked as a Complex Corrective OR Extracting Triangle would depend on time-wise retracement of c-leg.
If the rally of last 15 days was c-leg of the 2nd corrective, it would be retraced in faster time. However, if it was c-leg of Extracting Triangle, its retracement can take a longer time. Further, d-leg of an Extracting Triangle is usually the most complex development among its five legs.
 An ideal “suckers rally” usually involves making a New High. As we can be seen on the chart above, 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 corrective phase from ‘2000 to ‘2003, Index broke ‘2000 high by 100 pts, but even then shaved off 30% before the next rally could take place.
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.
We had argued that multi-fold rallies require multi-year consolidation phases to absorb the excesses during the multi-fold rallies.
Since the Sensex multiplied 7 times during ‘2003 to ‘2008, we argued it could require a multi-year consolidation, probably lasting 7 years from ‘2008, and such a consolidation would, accordingly, end only after ‘2015.
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 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).
The current phase from ‘2008 onwards is correcting the 56-month move from May’2003 to Jan’2008. It already has continued for 69 months from Jan’2008 till now, i.e. more time than the move it is correcting.
The question now is whether the corrective phase would end as a 5-legged Triangle, OR would it continue for 2 more legs and form as 7-legged Diametric.
At a minimum level, a move above ‘2008 highs would be required to justify and modify the corrective phase from ‘2008 onwards from 7-legged Diametric to a 5-legged Triangle, where E ended at Aug’13 lows.
By alternative thought process, it was suspected that the development from Jan’13 to Aug’13 was a 7-legged Diametric as was shown on the chart below.
 As was shown on the chart, all the up-down legs from Jan’13 to Aug’13, except “b”, consumed exactly 20-25 days
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.
By the same logic, on one higher degree, we had observed all the legs, except “b”, consumed about 13 months since the year ‘2008.
As was shown on the chart below, the fall from Jan’08 to Mar’09 was 13 months, and the same was labeled A of a large 7-legged Diametric formation. The B leg from Mar’09 to Nov’10 consumed 20 months. As argued, B leg can different time-wise.
The C leg (from Nov’10 to Dec’11) as well as D leg (from Dec’11 to Jan’13) maintained the time similarity, each consuming 13 months exactly. Under the circumstances, it was thought fit that the larger formation from ‘2008 onwards to be a 7-legged Diametric formation.
 This long-term picture was published on 6th Feb’12. The Diametric assumption also compared well with the 11-year formation previously seen during ‘1992 to ‘2003.
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 above ‘2008 high of 21207 (Nifty 6357).
Currently, therefore, we are toying with the idea that the up-move from Aug’13 lows is either “x” wave inside still-forming Complex Corrective inside E, OR its F leg of the Diametric (where E was the shortest leg instead of usual D).
The 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.
Despite FII Net additional Investment of Rs. 369901 crs in the last five years since ‘2008, the Sensex has not been able to cross its ‘2008 high so far.
How reliable is the FII Net Investment data coming from SEBI is another question. We generally see the inflated figure in FII buying matching with DII’s selling figure. However, above observation is made assuming the data from SEBI is correct.
The disparity between Sensex and broader market was shown on the comparative chart below :
 While the Small-Cap Index broke below its Dec’11 lows, and is now attempting to recover above the same, the Sensex itself is found struggling at the upper end of the channel shown on the following chart :
 This year, Sensex has made several attempts to break the upper end of the channel shown above, but each time it reacted lower. In case +ve options, Sensex may make another attempt towards the upper channel, but the move could still be part of the “x”.
The larger structural +ve scenario can open only if the Index breaks / sustains above this channel. If we continue the argument for multi-year consolidation phase, as explained previously, such a move could mean larger E ended in 8 months and F is opening.
It was argued that after a 7-fold rally from ‘2003 to 2008, Index may form a 7-year long consolidation phase from ‘2008 onwards, which could end only after ‘2015, which would achieve 161.8% time ratio with ‘2003-2008 rally.
To consume the required large amount of time, we thought a 7-legged Diametric formation would fit the bill, just like it did during ‘1992-2003.
If each leg of the Diametric consumes about 13 months, and so far all legs (except B) since ‘2008 did consume 13 months, it would amount to 7-year+ as consolidation phase.
Not related to Wave Labels so much on an immediate basis, the 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. Sensex has now completed 22 months since then without a 25-30% cut.
Even in case the Sensex opens +ve options in the short term as discussed, we should keep the 30% principle in the back of the mind, and act as required when the time comes.
As shown on the chart comparing Sensex with broader indices, one could see a 30%+ cut on the broader indices during ‘2013. Such cut is pending on the Sensex chart.
With the help of different heavyweights, Sensex has been attempting to take out ‘2008 highs for the last five years, but failed every time. Even during the current year, three such attempts were made, mainly with the help of ITC, but Index failed.
Despite all that, the broader market has kept itself suppressed. Indeed, BSE Small-Cap and Mid-Cap Index both shaved off over 30% during ‘2013. Further many investors’ stocks touched ‘2008 lows or even lower levels. Some of the favorite stocks from PSU / Infrastructure virtually turned into penny stocks.
Under the circumstances, the market does not appear running away. The long-term 7-8 year consolidation should continue in the broader market, if not on Sensex itself.
The recent supportive effort was seen protecting the Grid level near 17800 which was shown on the following chart. The upside Grid is at about 20250.
Since Jan’13, Sensex kept reacting lower from the Grid level at 20250, and later dropped to the lower Grid level at 17800. As we noted, VP’s 2450-point Grid System, thus, continues to provide important turning points since the year ‘2008.
 As was suspected, the Dollar-Rupee equation keeps guiding the movement of the stock market. The recent high of Dollar, at 69.23, achieved our projections made on 24th Jun’13.
In the Weekly Report dated 24th Jun’13, it was argued that the Dollar-Rupee equation has an inverted relationship with Sensex. Based on the Wave-structure shown, it was contended that :
“The year-long consolidation phase from Jun’12 to May’13 on the Dollar-Rupee chart looks like a 3rd Extension 5th Failure Terminal. On one higher degree, the Terminal could be part of an Irregular C-Failure Flat from Jan’12. If true, then as per NEoWave principles, Dollar can achieve 67 by Aug’14.”
As per NEoWave, after an Irregular C-Failure Flat, the next move should usually achieve 161.8% ratio to its ‘b’ leg from the end-point of ‘c’. Time-wise, this projection is usually achieved within the total period consumed by the Flat, i.e. within 16 months from Apr’13.
Remember, the projected level of Rs.67 was the “minimum” level to be achieved by Aug’14. It was argued that in actual terms it could reach higher than 67. Dollar-Rupee achieved 67 as was projected, and hit 69.23.
 On the Sensex chart, we had assumed that a major top was made during Jan’13 as per Jan-Topping Cycle. As it has been a totally polarized and selective market, the BSE Small and Mid-Cap Indexes shed over 30% each during ‘2013.
Indeed, this time the broader market has been leading the bearish sentiment even while Sensex was holding higher with the help of few heavyweights, mainly ITC.
While Sensex consists of 30 stocks, the BSE Small-cap universe comprises 459 and Mid-Cap 233 actively traded stocks. While Sensex universe mostly comprise institutional holdings, broader universe affects the small investor.
We had already followed a cautious approach near the 6 year highs. Earlier during Jan’13, based on the Jan-Topping Cycle (explained elsewhere in this report), we had warned of a major cycle top. Since Jan’13, major damages were seen in the broader market as well as many individual stocks and sectors.
Multi-Year long Diametric Formation
It was argued that all multi-fold rallies would be followed by multi-year long consolidations. Sensex, remember, rose 11-fold during ‘1988 to ‘1992, but entered a 11-year consolidation thereafter.
Again, during ‘2003 to ‘2008 it multiplied 7 times. Drawing similarity, it could a 7-year consolidation starting ‘2008. Further, the consolidation, may shape up like a 7-legged Diametric, similar to the consolidation seen from ‘1992 to ‘2003.
The Diametric formation from ‘2008 is also suspected because each of its internal legs, except B, have consumed about 13 months so far. So, the E wave from Jan’13 could also continue for about 13 months, and end somewhere around Feb-Mar’14.
This long-term picture was fist published on 6th Feb’2012, with both D legs highlighted in Purple color rectangles. In the previous instance, the D leg during ‘1996-97 had retraced as much as 97% of its preceding C leg. In the current instance, D retraced 84% of C.
Long-term corrective phase on Dow’s chart from the year '2000 onwards also appears to be a probable 7-legged Diametric.Instead of “Bow-Tie Diametric” on Sensex, Dow’s Diametric is shaping up as “Diamond-Shaped Diametric”.
Jan-Mar Topping Cycle
During Dec’12, it was pointed out that major tops occurred during Jan-Mar period in the last 13 years.
More than half the times, the top also occurred during the month of ‘January. Based on this, it was argued that Sensex could hit a major top during Jan’13, and it did. Substantial damage was, however, seen mainly in the broader market.
 This cycle may be the result of NAV pop-up exercise in the last month of the Calendar Year. Jan’13 was the 7th such top forming in the month of ‘Jan.
Performance of the Broader MarketThe broader market has, generally, under-performed the main Index since the year ‘2008, as can be checked on the chart below.
Indeed, the broader Mid-Cap and Small-Cap Indices have also broken 0-b lines (Red color lines) of the upward D leg. The Small-cap Index even broke its Jun’12 levels, and gave a faster retracement to the “c” part of post-Dec’11 rally.
Indeed, while the Sensex itself retraced 89% of it preceding 13-month fall from Nov’10 to Dec’11, BSE Small-Cap Index retraced only 38.2%, and has, in fact, reacted heavily from this retracement level.
The divergence between Sensex and broader market appears to be Index management activity, as the Sensex is held by the Index heavy-weights, while the broader shows distribution. This whole thing, however, made for a tricky and uncomfortable trading environment.
NEoWave DiscussionsInside the D leg from Dec’11 to Jan’13, we had had assumed a 3-legged a-b-c Flat. The “c” part was a 5-legged Impulse, inside which,5th leg (beginning Nov’12) was assumed to be a Terminal.Based on NEoWave requirements, it was argued that Sensex would drop below Nov’12 lows in 50% time of the 48-day long Terminal. Index eventually did drop below Nov’12, but took 48 day or 100% time (instead of 50%).As an abundant precaution, therefore, following alternate wave-structure was suggested for the D leg from Dec’11. D is now completing 161.8% time ratio to C.
 In the alternate scenario, “c” ended at Oct’12 high, and it was equal to “a” leg. The “d” was the smallest segment, and “e” (i.e. post-Nov’12 rally) was a “Double Combination” which ended in Jan’13.
The post-Nov’12 rally is retraced by 100% on Sensex, but more than 100% on broader indices. The larger picture of Diametric from ‘2008 onwards is, therefore, considered probable.
That would mean 13-month long D-leg has ended at Jan’13 highs, and 13-month long E-leg started thereafter.
NEoWave, remember, allows exceptions to rules at important market turning points or under “unusual” conditions, like end of larger patterns or last wave, such as a Terminal.
Also, Triangles and Terminals are exceptions to virtually all rules. Since Diametric pattern is made up of Triangles, NEoWave “Exception Rule” is also applicable to these patterns.
Since we were at an important turning point in Jan’13, and dealing with Terminal and legs of Diametric, perhaps pattern implication rules could not be satisfied to the full extent.
Does it really matter whether the Sensex achieves the pattern implication accurately within the time-price parameters, when the general direction of the secular market has been largely -ve as we suspected since Dec’12 ?
As we argued, the larger bear phase is already visible in the broader market. Since ‘Dec’12 we turned cautious as the rallies were getting smaller (shaping into a Terminal), and also because of the ‘Jan-topping cycle (discussed separately).
Terminal we assumed from Nov’12 to Jan’13, is a special kind of Impulse which occurs in the last wave position, i.e. either as “c” of Flat/Zigzag or 5th of an Impulse. Its internal structure is made up as 3-3-3-3-3, instead of usual 5-3-5-3-5.
In other words, each leg of a Terminal would develop as a 3-legged or 5-legged “corrective” structure, like a Flat, Zigzag or Triangle. Also, 4th of Terminal must enter the area covered by the 2nd (Overlap Rule).
A line similar to the 2-4 line on Sensex can also be drawn on the broader indices, and the same has been broken (as discussed separately).
Sensex, consumed 59 weeks to retrace 84% of its preceding 13-month fall, which also was a 59-week affair, as shown on the chart below :
 The rally, accordingly, was considered slower, corrective structure as per NEoWave, and not as part of any fresh rally.
The channel enclosing the a-b-c Flat inside the larger D leg from Dec’2011 onwards was shown on the chart below :
The 80% retracement level was considered and marked as a pattern implication for the 13-month long Double Combination move marked as C. Pattern implications, however, cannot be strictly enforced for the legs of Triangle and Diametric, which are exceptions to the general rules.
As per NEoWave, most channeled moves enclose a Complex Corrective structure involving “x” wave. Complex Corrective involving 2 correctives, joined by one “x” wave, is called a Double Combination, and carries a pattern implication of not more than about 80%.
Note that the C leg of Sensex, from Nov’10 to Dec’11, was a Double Combination, with two equal-sized correctives (see weekly chart given above), and therefore, carried a pattern implication of 80% retracement by the D leg.
Further, as depicted on the chart below, since Nov’10, it has been generally useful to consider 61.8% to 80% retracement area as crucial for terminating moves.
 As per Wave Theory, Flat is a 3-legged corrective pattern marked as a-b-c, where “b” corrects more than 61.8% of “a”. It is also a 3-3-5 pattern where “a” and “b” carry corrective label of :3, and “c” is an impulse label of :5.
Around a Flat, we usually draw a line joining “0” and “b” (0-b line), and take a parallel from the “a” point. The “c” leg should normally end near such parallel. The channel indicates similarity of its 3 internal legs, reason why Flats are called Flats.
Inside “c” of D (beginning Jun’12) for Sensex, we were expecting a 5-legged Impulse, because Flat is a 3-3-5 structure.
As per NEoWave “Extension rule”, one of the directional leg inside an Impulse should get “extended”, i.e. achieve 161.8% ratio to the next largest leg.
Since 1st and 3rd were “normal”, we could have projected 5th wave Extension. However, such a move would project values slightly above the Nov’10 highs, which would jeopardize the larger assumption of “Bow-Tie” shaped Diametric from ‘2008 onwards.
We, therefore, preferred 5th of “c” not to achieve 161.8% ratio, but terminate below Nov’10 highs, from where a downward E would open. Since E begins the “expanding” phase of the Bow-Tie Diametric, it would break below Dec’11 lows.
The 1st and 3rd inside “c” of D continued for about 4-5 weeks each. We expected 5th to consume a similar time, and end somewhere in the month of Dec’12 or near to it.
As the beginning part of 5th shows violence on upside, we suspected 5th could develop internally as a 1st Extension Impulse or Terminal. Since a “Terminal” always occurs at major turning point, it would be able to generate the necessary downside power for the larger E leg.
In the 7-legged “Bow-Tie” shaped Diametric from ‘2008, one can see a reduction in magnitude from A leg to D leg. The D leg is the smallest segment of the Bow-Tie shaped Diametric.
The other half of this Diametric, i.e. E-F-G legs, should show expanding magnitudes, and therefore, E should become larger than the D leg. This can happen only when E breaks the bottom Dec’2011.
After breaking the 13-month long channeled C (from Nov’10 to Dec’11), we had suspected that development post Dec’11 has potential only to be marked as D leg of a much larger Triangle or Diametric from ‘2008.
This option was preferable because C leg from Nov’10 was not an Impulse. A Non-impulsive C leg could only be part of a larger Triangle or Diametric.
BSE Dollex-30 IndexMeanwhile, since the FII activity turned a prominent factor in the Indian stock market, we examined the development of BSE Dollex-30 Index, which showed a Head & Shoulders formation around Oct’12 on its Daily chart.
Its downsides later achieved the Head-to-Neckline projection on downside, as we expected. Since the projection level also matched with its 200-day EMA, we suspected some pull-back. It did pull back till Jan’13.
This Index achieved H&S protection and has now recovered above its 200-day EMA.
Yearly lows
Sensex has broken ‘2010 low of 15652, and now in ‘2012 is found holding the ‘2011 low of 15136.
As the past instances would show, once the yearly low gets broken, a minimum of 20% cut from the low has been a usual phenomenon, though gradually. A 20% magnitude reduced from 15652 would calculate to about 12500 for Sensex.
This level has not been touched so far, but should be remembered as a crucial level which matches with the huge gap-up action (refer to the Weekly chart discussing 32-week cycle) seen during the ‘2009.
32-Week time cycle
The development since Mar’09 has followed a 32-week time cycle, as shown on the chart below.
 This was used for raising a possibility that an important low would be formed around 20th Aug’11. Sensex responded by hitting the bottom on 26th Aug.
This cycle had also raised the possibility of an upward/sideways phase that could survive for 32 weeks from Aug’11, and end either on 4th Feb’12 or 31st Mar’12, developing as a ranged movement like the Left Shoulder. The upward phase ended during Feb’12 as per this cycle.
Going by the structural possibilities from this cycle, it was suspected that Sensex could be forming an “e” leg of a possible Extracting Triangle, which would remain smaller than the “c” leg. The “e” leg did remain smaller as suspected.
As we already know, Extracting Triangle is a pattern which shows smaller rallies and bigger drops. Thus in one direction, it shows e < c < a, and in the opposite direction, it shows d > b.
Above 18000, Right Shoulder became bigger that the Left Shoulder, which appeared rejecting the Head & shoulders or “Extracting Triangle” argument. However, the 32-week time cycle may remain valid as a cycle even from here.
The Sensex was seen testing the “Neckline” shown on the chart, which did prove crucial, as Sensex bounced several times from the Neckline.
Another idea would be to mark the entire development as a Diametric, instead of Extracting Triangle, and the same is now marked on the chart. These assumptions indicate an incomplete B, but confirms only on faster drop below the Neckline, which is still awaited.
Recent recovery happens to be exactly at 32-week cycle turning point.
30% Principle
All major tops are characterized by 30% drop from the top value. This is normal not only inside a bear phase, but is commonly seen even inside a bull phase too. The 30% taken out from the current top value on Sensex (21109) would be less than 14800.
The total loss so far, from the high of 21109 to 15425, measures around 28% so far. However, on BSE Small-Cap and MidCap Index, the loss from ‘2010 high does measure more than 30%.
Overall, it was argued much earlier, that we would see a topping formation spread over 2-3 month period beginning ‘Oct’10. This played out well as suspected. Indeed, as was observed, 60% of stocks topped out during ‘Oct’10 itself, and many have already shaved off much more than 30%, though Sensex itself shaved off only 28%.
2450-point Grid chart for the Sensex
Sensex has been following a Grid of 2450-2500 points since ‘2008. These Grids are shown on the Weekly chart of Sensex below. One can find a bottom or a top getting formed at each of the Grid levels.Index during ‘2013 reacted thrice from the Grid level at 20250, and is now protecting the next lower Grid level at 17800.
The larger picture
Our markets, remember, has seen multifold rallies previously, each time continuing for about 4 (four) years, after which, it usually enters a multi-year consolidation phase. In other words, “long-term” has always meant 4 years in Indian context.
Remember, Sensex rallied 11-fold from 390 (Mar’88) to 4546 (Apr’92) in four years, after which it consolidated for 11 years from ‘1992 to ‘2003.
In ‘2008, it completed another 4-year rally from ‘2003, during which Sensex rose 7-fold from 3000 levels to 21000. It may now consolidate for 7 year, beginning ‘2008, preferably forming as a Triangle or Diametric.
We explained that the 14-month fall from Jan’08 was a Triple Combination “A” leg of a large multi-year consolidation. The corrective phase beginning Mar’09 retraced about 99% of the previous fall from 21206 (Jan’09) to 8867 (Mar’09), (which was labeled as a Triple Combination). The longer time required while rallying is symptomatic of its corrective label of “B”.
The rally from 8047 (actually beginning at 8867) was, therefore, considered as the “B” leg. The next leg downwards would be labeled as “C”. Such a-b-c development since Jan’08 would be considered part of the 2nd wave of what appears as a probable Terminal beginning ‘2003.
Even though we saw the market reaching levels above Jan’08 highs, the multi-year consolidation is expected to shape up like a large decade-long Diametric, looking similar to the consolidation we saw from ‘1992 to ‘2003. Our trading/investment strategies should be designed accordingly.
The suspected corrective phase beginning Jan’08 would be the 2nd wave within the larger 5th wave. This 5th wave is suspected to be forming as a Terminal due to absence of impulsive behavior in its internal 1st wave. The “Terminal” confirms when the Sensex drops below the 2-4 line of one higher degree.
One may see the Yearly chart in Appendix, which shows the 2-4 line and its values for the next three years. Remember, Terminal development usually violates the 2-4 line.
The Sensex is assumed to be under the influence of a large 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 our Super-Cycle Degree count, shown on ASA Long-Term chart under a separate paragraph, we’ve considered ‘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.
During ‘2008, we were sitting on this very important cycle, which therefore, threw up similar possibilities.
In the previous 8-year cycle top during ‘1992, Sensex lost 57% from 4546 to 1980. In the next cycle top, the cut was almost 58% from 6150 in ‘2000 to 2594 in ‘2001.
We had, accordingly, targeted sub-10k levels for Sensex price-wise during ‘2008-09, and a minimum of 13 months into bear phase, time-wise. The price-time targets were achieved as Sensex dropped 63% from 21206 to 7697. The yearly channel, shown below, which was 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 a larger corrective phase following this 8-year cycle.
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 1stwave 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.
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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. |
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