Weekly Technical Analysis

February 11,2013

- By Vivek Patil, India's foremost expert in Elliot Wave Analysis

Top Stories of the Week

Sensex drops another 300 pts, total loss 800 pts from the 29th Jan top. CSO forecasts 5% GDP growth for FY13, lowest in decade. Companies paying lower Service Tax get show cause notices. NTPC OFS subscribed fully. ECB holds rates at record low of 0.75%. MCX-SX begins trading in equities from 11th Feb.

Sensex close to 2-4 line, 19100-200 crucial for a relief bounce in the next 3 days

[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, What we see as a minor top this Jan, could turn out to be a major one if certain further confirmations are in place from here 1st stage of confirmation requires break of the bigger 2-4 line, shown in Purple color 2nd stage of requires drop below Nov12 low we argued that 5th would end below 20303 by 29th Jan top of 29th Jan was made amidst RBIs Credit Policy. After RBI announced rate cut, traders adopted sell on news strategy. NEoWave requires full and faster retracement of the 5th leg, i.e. drop below 19596 within 13 days the Terminal formation from Nov lows could prove an extremely bearish pattern, indicating possible downside violence.

Sensex started higher on Monday. However, up 120 pts at open, it began selling off almost immediately. By Thursday, it had broken 19596, i.e. the low of Extracting Triangle in the 5th leg. Losing further on Friday, it finally ended 300 points or 1.5% lower for the week. Except IT, all other sectors ended with losses. The Consumer Durables, PSUs, Metals, Power and Oil Indexes lost about 4 to 5% each. BSE Small-Cap Index lost 3.7%, and Mid-Cap Index lost 3%.

Sensex is down by nearly 800 pts or 4% (Nifty 228 pts) in the last 8 days from the highs it made on 29th Jan. The broader market topped out earlier, i.e. on 7th Jan. While the BSE Mid-Cap Index has already lost about 9%, the Small-Cap Index is down by nearly 12%.

As was pointed out last week, this made the current drop the biggest since Nov12, giving a -ve sign as per VPs structural logics.

We had already turned cautious at higher levels because the time cycle indicated major top occurs during Jan-Mar period. This had happened in 12 out of 13 years in the recent past. Indeed, in 50% cases, major top was hit in the month of January.

We were also cautious because the rallies from Nov12 onwards were getting smaller. Indeed, due to the smaller rallies, the development post-Nov was shaping up like a Diagonal Triangle or Terminal.

The 5th leg of this Terminal from 19596 of 10th Jan (Nifty 5940) developed as an Extracting Triangle, a 5-legged pattern showing smaller up-moves (e < c < a) and bigger down-moves (d > b).

Last week, with a drop below 19596 (Nifty 5940), the 13-day long Extracting Triangle was completely retraced in 7 days, or in about 50% time. This faster retracement confirmed end of Extracting Triangle from 10th Jan, as well as Terminal from Nov lows.

We had also warned about the downside violence, because a move in the opposite direction should begin with faster retracement of the last up-move. This was to be seen on various degrees.

Thus, not only e of Extracting Triangle (from 19884 of 24th Jan) saw its faster retracement, the 5th leg of the Terminal (from 19596 of 10th Jan) also was retraced in faster time.

As per NEoWave, the Terminal should get completely retraced in maximum 50% time, but usually it does that in 25% time only.

The Terminal from Nov low formed over 48 days. Therefore, Nov lows should be broken within 12 to 24 days from 29th Jan. Of this, 8 days are already over.

This requirement is part of what is called as Pattern Implication as per NEoWave logics. Patterns must follow their implications, and they confirm when the implication is in place.

In other words, no implication, no Terminal. Thus, only if Sensex fails to break below 18256 (Nifty 5548), that we look for alternatives to our current assumptions. Else, the current assumptions are valid.

A Terminal terminates structure of at least one higher degree. On one higher degree, we assumed thee Terminal to be part of the c leg of Impulse from Jun lows.

The c leg will be confirmed over when its 2-4 line gets broken (1st stage confirmation), and 5th leg, i.e. Terminal, is completely retraced (2nd stage confirmation), both to be achieved in faster time. (These confirmations are similar to pattern implication for the smaller 5th leg, which developed as a Terminal).

Further, this c is part of the larger D leg from Dec11 low of 15136 (Nifty 4531). Thus, the current assumption not only indicates a gradual fall below Jun12, but also below Dec11 lows.

Coming to short term scenario, the fall over the last two weeks has maintained a Red falling channel, as shown on the chart/s above. Fridays intra-day drop was the biggest in the last 8 days.

Index has failed to do this in the last 8-9 days. Indeed, Sensex has now hit 9 continuous lower lows on its Daily chart.

Study of movements over last many years shows that Index recorded a maximum of 10-11 lower lows in the worst of the situations. Going by this past history, Sensex may not make more than 1 or 2 lower lows from hereon.

Remember, the oscillator on the Daily chart has remained in an oversold zone. Accordingly, some relief bounce cannot be ruled out anytime in the first half of the coming week, i.e by Wednesday.

The chart shows 19100-200 (Nifty 5800-50) as a very significant area for the coming week. This area consists of the lowest point of 2nd of 5th leg and highest point of the 3rd inside c.

The suspected relief bounce is likely to come from closer to 19100-200 (Nifty 5800-50). We must, therefore, watch this area carefully.

The only question really is whether the relief bounce would come after breaking the Purple color 2-4 line joining Sep and Nov lows or not. As one can see on the Daily chart, Fridays low is very close to this 2-4 line.

However, if we check on the Nifty and Nifty Future Daily charts, the equivalent 2-4 line (joining Sep and Nov lows) was broken on Friday. Sensex is more likely to do the same, and break its 2-4 line before bouncing.

After Fridays biggest sell-off in 8 days, the lows are also touching the lower end of the Red falling channel. Therefore, watch for some relief in fall in the 1st half of the coming week.

Bias would remain -ve as long as the action from hereon maintains the Red falling channel, and fails to take out and close above previous days high.

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Terminal 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).

Virtually all Terminal actions produce NEoWave Supplemental Price & Time actions. That allows markets to go further and take longer than the best calculated levels, only to do what was originally expected.

As we discussed lat week, the 5th leg stretching beyond 20303 price-wise and 29th Jan time-wise, could indicate NEoWave supplemental action.

Even before -ve confirmations would occur, we were already approaching the market with caution, because of the Jan-Mar topping cycle and smaller rallies.

Remember, major tops occurred during Jan-Mar period in the last 13 years. We, therefore, continue to remain cautious, and wait for actual -ve confirmations.

If the Sensex avoids what was explained earlier as Supplemental action, 5th may end at a level below 20303 price-wise, and between 22nd and 29th Jan, time-wise. At least a minor top was seen last week at these projected time/price levels.

As was mentioned, a Terminal would terminate at least one higher-degree larger structure, which, in our case, is the larger D Wave Flat from Dec11 lows.

Terminal would create a major top, where the 13-month long D leg would end, and another year-long downward wave, i.e. E, would begin.

The caution is also advised because the post-pattern implications of Terminal are severe. The entire Terminal is completely retraced in 50% time, though it usually takes only 25% time.

This would mean there could be severe drop below Nov lows once the Terminal is over. This, however, would be just the beginning of a larger downwards phase, which would eventually even break below the Dec11 lows, as suggested by the larger Diametric formation since the year 2008.

Except B, all the legs of the larger Diametric from 2008 consumed about 13 months. In time similar to C, the D leg has retraced only about 84% of C. This only highlights the corrective nature of the post Dec2011 rally.

The channel enclosing the a-b-c Flat inside the larger D leg from Dec2011 onwards was shown on the chart below :

The projection to upper channel was exactly achieved.

The 80% retracement level was considered and marked as a pattern implication for the 13-month long Double Combination move marked as C. This pattern implication, however, cannot be strictly implemented for the legs of Triangle and Diametric, which are exceptions to the general rules.

On higher-degree, it was explained that the D leg from Dec11 onwards was part of a larger 7-legged Bow-Tie Diametric.

This larger Diametric begins from 2008, and could develop similar to the Diametric formed during 1992 to 2003, as was shown on the Monthly chart of Sensex below :

This long-term picture was fist published on 6th Feb2012, 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.

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 from Nov10 to Dec11 was a Double Combination, with two equal-sized correctives (see weekly chart above), and therefore, carried a pattern implication of 80% retracement by the D leg.

Further, as depicted on the chart below, since Nov10, it has been generally useful to consider 61.8% to 80% retracement area as crucial for terminating moves.

Meanwhile, since the FII activity turned a prominent factor in the Indian stock market, we examined the development of BSE Dollex-30 Index, which recently showed a Head & Shoulders formation 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 to the Neckline.

As can be seen on the Dollex-30 chart below, the Index recovered back to its Neckline level for the 2nd time, but has now reacted from heavily from the Neckline.

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.

Unless it proves to an Elongated Flat (a sub-type of Flat where c becomes longer in terms of time and price), wed initially assume any Flat to be a common Flat.

Inside c of D (beginning Jun12), 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 can see a 5th wave extending inside c of D. However, such a move would project values slightly above the Nov10 highs, which would jeopardize the larger assumption of Bow-Tie shaped Diametric from 2008 onwards.

Wed, therefore, prefer 5th of c not to achieve 161.8% ratio, but terminate below Nov10 highs, from where a downward E would open. Since E begins the expanding phase of the Bow-Tie Diametric, it would break below Dec11 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 Dec12 or near to it.

As the beginning part of 5th shows violence on upside, 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 a 7-legged Bow-Tie shaped Diametric, 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 Dec2011.

After breaking the 14-month long channeled C (from Nov10 to Dec11), we had suspected that development post Dec11 has potential to be marked as D leg of a much larger Triangle or Diametric from 2008.

This option was preferable because C leg from Nov10 was not an Impulse. A Non-impulsive C leg could only be part of a larger Triangle or Diametric.

Inside D, b corrected a by 80% price-wise, and by 161.8% time-wise. From 4th Jun low of 15749 (Nifty 4770), Sensex is assumed to be forming c of the Flat, which should be the last Impulsive wave of a 3-3-5 structure inside the Flat.

The final confirmation that 5th of c, and therefore the D leg is over would require faster drop below 18255 (Nifty 5548), as per NEoWave requirements.

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 Mar09 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 Aug11. 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 Aug11, and end either on 4th Feb12 or 31st Mar12, developing as a ranged movement like the Left Shoulder. The upward phase ended during Feb12 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.

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 Oct10. This played out well as suspected. Indeed, as was observed, 60% of stocks topped out during Oct10 itself, and many have already shaved off much more than 30%, though Sensex itself shaved off only 28%.

Comparison with Jan'08 top formation

We compared the 2010 topping formation to the movement from Oct07 to Jan08, a 2.5 month period just before the high of 21206 was hit on Sensex. This was also an extremely volatile period of nearly two months, just before the market actually topped out.

The following chart of 2008 period shows two equidistant parallel channels. The Sensex broke above the original channel and achieved an equidistant height at the upper parallel, before reacting lower into a bear phase.

One may observe the volatile development once it reached closer to the upper parallel. Inside this volatility, the market faced number of sell-offs beginning Oct07, before it finally topped on 8th Jan08.

A similarity can be drawn for the 2010 top formation with the developments of 2008, as shown below. Sensex was seen testing the lower Blue parallel, from where it bounced recently. It is now trading above the Blue parallel, retesting it again.

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 had broken above the 17800 grid level, was testing the next Grid level at 20250. It has now reacted lower almost exactly from this Grid level.

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 (Mar88) to 4546 (Apr92) 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 Jan08 was a Triple Combination A leg of a large multi-year consolidation. The corrective phase beginning Mar09 retraced about 99% of the previous fall from 21206 (Jan09) to 8867 (Mar09), (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 Jan08 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 Jan08 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 Jan08 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, weve 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 : Long-term scenarios for Sensex

As for the larger-degree wave-scenarios, I consider 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. This has been my preferred scenario for many years, which I had assumed to be under development since I began long-term forecasting during 1997-1999. This one was the basis of Forecast for the 21st Century article published in Business Standard (which can be read on vivekpatil.com).

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. This forecast was achieved. This scenario is shown on the chart given below :

As per my second alternative, a Super-Cycle-Degree 3rd (or 5th) began since Nov84. Its internal 3rd was an extended leg, which achieved exactly 261.8% ratio to the 1st on log scale. The Sensex is now forming its 5th Wave, and the same is likely to develop as a Terminal, because its lower-degree 1st wave since May03 developed as a Diametric (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, as shown below.

Since the 5th is now more than 61.8% of 3rd, it may lead to a "Double Extension" scenario, wherein both 3rd as well as 5th would be extended waves. This scenario is shown on the the chart given below :

Development from May03 is a 7-legged Diametric formation, 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.

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The Diametric development from 2003 to 2008 has been considered as the 1st of the 5th. Due to the corrective structure in the 1st leg, larger 5th could be developing as a Terminal. Since 2008, we are into its 2nd wave, which could continue to develop over 8 years from 2008.

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

The wave-count presented on ASA Long-term Index favors the alternate wave-scenario discussed above. The labels show that the market is into the lower-degree 5th of the SC-degree 3rd or 5th wave. If a "Double Extension" unfolds, Sensex could be projected to achieve even 50000+.

A break of 2-4 line would confirm the Terminal development inside the 5th, and would therefore, restrict the upsides to much lower levels than 50K, but end surely above 21000.

If the 5th proves to be a Terminal, one larger-degree label of 3rd will have to change to 5th, because only a 5th of the 5th can be a Terminal. The Super-Cycle-Degree marking for 1st and 3rd shown, would then change to 3rd and 4th respectively, as shown in White.

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.