Weekly Technical Analysis 31ST DEC 2012

7/28/2019 Weekly Technical Analysis 31ST DEC 2012

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Weekly Technical Analysis

December 31,2012

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

Sensex ends 1% higher in the truncated week, maintains 4-week range. India Inc's interest burden reported to be at 9-year high. Govt proposes Diesel prices to be hiked gradually @Re.1 per month. Market hinged on fiscal cliff negotiations, year-end NAV consideration. Job generation saw 21% decline during '2012, as per Ass. Chamber of Commerce. Thorat Committee recommends asset size of Rs.25 crs for NBFCs. Ratan Tata retires, Cyrus Mistry takes over Tata Group.

Top Stories of the Week

2-week high-low, i.e. 19504-21 and 19149, appear crucial as we enter '2013

[Technical readings carried forward from previous weeks are shown in italics. Readers can easily identify the newwhich are written in regular font]

Last week we discussed, The action is maintaining itself to a small range for the 3rd

week running A rough cdrawn around the action provide flat perspective to the ranged action, which we structurally marked as the the 5

thof c of larger D 2

ndlooks incomplete 2

ndcan consume 161.8% time compared to the 1

st, and ret

to 61.8% eversince Jun12 lows, all rallies were retraced by about 50% We may watch the last weeksdownsides to 50% levels only when same is broken decisively Till a falling segment is retraced complettime, the 2

ndwould be continuing to form.

Sensex held previous weeks lows, and attempted to recover during the 4-day long truncated week. Thougpercent higherfor the week, the weekly range remained enclosed inside the previous weeks high -low. It, in effecHarami or inside Bull candle for the week. While most sector ended flat to +ve, the Oil&Gas and Realty Ind

with over 2% gain each.


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Since the action remained inside our channeled flat range for the 4th

week, and there was no retracement of any fafar, we may continue to assume Sensex is still forming the 2

ndleg.

The 2nd

leg is correcting the 1stleg from Nov lows to Dec highs. So far, 2

ndhad corrected the 1

stby only 38.2%

and about 100% time-wise. After completing the 1st

on 6th

Dec, the 2nd

has so far consumed 13 days.

The 2nd

will be assumed to be continuing till we see faster retracement of its last falling segment.

The downside potential of 2nd

is 50% retracement to 1st

, but since it is maintaining a range for 4 weeks so far, wdownsides towards 50% retracement levels only if the action weakens below 4-week lows of 19149 (Nifty 5


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The 50% retracement level to the preceding rally from Nov lows to Dec highs calculates to about 18900 -50 (Niftymarked on the chart above.

As can be checked on the chart, all the rallies since Jun12 were retraced by about 50%. (1) 1

strally from 15749 to 17631 was corrected to 16598, i.e. about 50%.

(2) 2nd

rally from 16598 to 17973 was corrected to 17251, i.e. about 50%.(3) 3

rdrally from 17251 to 19137 was corrected to 18256, i.e. about 50%.

Meanwhile, traders have been forced to remain in a trading mode for the 4th

week running. Index cannot remain for a long time, and would break it eventually.

For an upside break, the crucial levels could be the 2-week highs of 19504-21 and the top of 1st

at 19612.

Upside break would be labeled as the 3rd

leg, which could remain smaller than the 1st

leg because we are iassuming the possibility of 1

stExtension Impulse inside the larger 5

thwave of c of D.

On downside, well continue to watch the 4-week lows of 19149 (Nifty 5823), weakness below which will beopen lower levels towards 50% level marked on the charts, at 18900-50 (Nifty 5750-60).

For confirming that 2nd

leg is over and 3rd

has opened upwards, we require faster retracement of the last falling se2

nd.

On a higher degree, we had assumed that larger D leg began in Dec11. The rally to Feb12 high was its a leJun12 low its b leg. The c leg from Jun12 onwards is hitting the parallel channel drawn around the a-b


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inside D.

We had argued that since the year 2000, except for 2001, the month of Dec always created a Bull candle . led to maturity of the rally in the next 1-3 months.

We, accordingly, may be leading to a major topping formation soon. Such a formation could see rallies getting smastructurally a 1

stExtension Impulse or Terminal inside the 5

thof c.

Coming to last week, though the action formed a Bull candle, its high-low range remained enclosed inside previoucandle. Harami candles, ranged inside previous day, are generally considered indecisive.

The high of the candle has still not cleared the Pink resistance line drawn joining previous two highs inside thof last three weeks, i.e. joining the highs of 19612 (11

thDec) and 19521 (20

thDec).

On the Nifty Future chart, a similar line (joining the tops) was broken on upside. However, even on Nifty Future, thremained inside its 3-week range, and failed to cross previous weeks high of 5961, which appears crucial.

On Sensex itself, below the four trading sessions of last week, an approximate support line can be drawn on thethe same has been shown on the Daily chart in White color. On an immediate basis, on the last day of 2012 towatch this White line on downside.

If the Index begins weakening below this White Line, it could send - ve indications. This line is valued closer to Frid19346 (Nifty 5879).

Dec12 opened at 19342 (Nifty 5878). If this Monday ends anything above this level, the monthly action woBull candle.Except for 2001, the month of Dec always ended as a Bull candle, ever since 2000.

TheYearly candle for 2012 would also end as a Bull candle, but would remain as an indecisive Harami ohigh-low of 2011.

If the Index fails to hold even the 50% retracement levels, it could drop lower to test the 2-4 line, as shown on the

As p er NEoWave, the break below 2-4 line would either indicate that the Impulse that started from Jun12 o

over, OR the 5th

is developing in to a Terminal.

Inside a 1stExtension Im puls e, i ts low er-degree 1

stwo uld be the largest ral ly, and 3

rdand 5

thwould sho w s

because of which the 5thof c would shape up like a Diagonal Triangle.

The channel enclosing the a-b-c Flat ins ide the larger D leg from Dec2011 onwards was shown on the chart belowprojection, shown on 17

thSep12, is now exactly achieved at the upper end of the channel, price -wise and

Can i t achieve som eth ing more ?

Once we conf i rm opening of 3rdo faster retracement abov e 2

nd, we wi l l be looking for the 2

ndtarget area m

19800-900.


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As was mentioned, while on arithmetic scale the value of the upper parallel line was at about 19400-500, considered as our 1

sttarg et (Nifty 5950-6000), it com es to abo ut 19800-900 (Nifty 6100-6150) on log scale

considered as our 2ndtarget.

On one higher-degree, it was explained thatthe D leg from Dec11 onwards was part of a larger 7-legged BoDiametric.

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


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This long-term picture was fist published on 6thFeb2012, with both D legs highlighted in Purple color rectangles.

While the Upp er l ine of th e latest Rectang le was at 80% retracement level (Sensex 19800-900) to C leg, the

drawn at Dec12 (the current month). The Sensex is now close to the maturity levels shown by this proje ctas wel l as time-wise.

As per NEoWave, most channeled moves enclose a Complex Corrective structure involving x wave. Complex Cinvolving 2 correctives, joined by one x wave, is called a Double Combination, and carries a patte rn im pmore than about 80%.

Note that the C leg from Nov10 to Dec11 was a Double Combination, with two equal-sized co rrectives (seeabove), and th erefore, carr ied a pattern im pl ication 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% retracrucial for terminating moves.


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This chart also shows 61.8% and 80% retracement level to the entire fall from Nov10 to Dec11 as maximum upsiD leg.

Meanwhile, since the FII activity turned a prominent factor in the Indian stock market, we examined the developmeDollex-30 Index, which recently sh ow ed a Head & Shoulders fo rmationon its Daily chart.

Its downsides laterachieved the Head-to-Neckl ine projection on dow nside, as we expected. Since the projecmatch ed with i ts 200-day EMA, we susp ected some pul l -back to the Neckl ine.

One may also note thatwh ile Sensex recently made a higher high compared to Oct12, Dollex-30 maintaineAs can be seen on the Dollex-30 chart below, the Index reacted dow nwards from the Neckl ine leve l , and is noforming a falling channel shown in Red.


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As per Wave Theory, Flat is a 3-legged corrective pattern marked as a-b-c, where b corrects more than 61.8% o3-3-5 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 legnormally end near such parallel. The channel indic ates simi lar i ty of i ts 3 internal legs, reason w hy Flats are cUnless it proves to an Elongated Flat (a sub- type of Flat where c becomes longer in terms of time and price), weassume any Flat to be a common Flat.

This could mean c may end either near 19400-500 (arithmetic-scale value of the parallel) or 19800-90 (log-scaleparallel).

Time-wise, Dec has always proved a +ve month since the 2000, except during 2001 and 2011. At the same t2006, all major/minor tops occurred during Dec-Mar period.

We cannot , therefore, rule out the 1-year long D-leg Flat from Dec11 would end during this period.

Inside c of D (beginning Jun12), we were expecting a 5- legged Impu lse, because Flat is a 3-3-5 structure. NEoWave Extension rule, one of the directional leg inside an Impulse should get extended, i.e. achieve 161.8%largest leg.

Since 1st

and 3rd

were normal, we can see a 5thwave extending inside c of D. However, such a move would pro

slightly above the Nov10 highs, which would jeopardize the larger assumption of Bow-Tie shaped Diametric from


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Wed, therefore, prefer 5thof c not to achieve 161.8% ratio, but terminate below Nov10 highs, from where

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, andsomewhere in the month of Dec12 or near to it.

As the beginn ing part of 5thshows vio lence on upside, 5

thcou ld develop internal ly as a 1

stExtension Impu

Since a Terminal always occurs at major turning point, it would be able to generate the necessary downside powE leg.

In a 7-legged Bow-Tie shaped Diametric, one can see a reduction in magnitude from A leg to D leg. The Dsmal lest segment of the Bow -Tie shaped Diametr ic .

The other half of this Diametric, i .e. E-F-G legs, should sh ow expand ing m agnitud es, and therefore, E shou

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 pospotent ia l to be marked as D leg of a mu ch 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

larger Triangle or Diametric.

Inside D, b corrected a by 80% price-wise, and by 161.8% time-wise. From 4thJu n low of 15749 (Nifty 4

assumed to be forming c of the Flat, which should be the last Impulsive wave of a 3 -3-5 structure inside the

Since the 1st

leg looked strong, it was argued that the 5thof c could develop as a 1

stExtension Impulse, where ra

smaller. It was also said that 5thof c could even develop as a Terminal Impulse, if its 4

thoverlaps the area covere

see.

If we are currently dealing with only 1st

and 2nd

legs inside 5th

of c, the larger 5th

of c may stretch itself into next argued, since 2000, most tops occurred during Dec-Mar period.

The final confirmation that 5thof c, and therefore the D leg is over would require faster drop below 18255 (Nifty 5

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 wo uld show , once the year ly low gets broken, a min imum of 20% cut from the low h

phenomeno n, thoug h gradual ly. A 20% magnitude reduced fro m 15652 would c alculate to abou t 12500 for

This level has not been touched so far , but sh ould be rememb ered as a cruc ia l leve l which m atches wi th t

action (refer to the Weekly chart disc uss ing 32-week cycle) seen during the 2009.


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32-Week time cy cle

The development since Mar09 has followed a 32-week tim e cycle, as shown on the chart below.


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This was used for ra is ing a possib i l i ty that an important low w ould be formed around 20thAug11. Sensex

hi t t ing the bottom on 26thAug.

This cycle had also ra ised the p ossib i l i ty of an upw ard/s idewaysphase that could survive for 32 weeks froend either on 4

thFeb12 or 31

stMar12, developing as a ranged movement like the Left Shoulder. The upwa

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 Extracting Triangle, which would remain smaller than the c leg. The e leg did remain smaller as suspec

As we already know, Extract ing Tr iangle is a pattern which s how s sm al ler ra l lies and b igger drops. Thus in shows e < c < a, and in the opposite direction, it shows d > b.

Above 18000, Right Should er became bigger that the Left Shoulder, which appeared rejecting the Head & sExtracting Triangle argument. However, the 32-week time cycle may remain val id as a cycle even from h

The Sensex was seen testing the Neckline shown on the chart, which did prove crucial, as Sensex bount imes from the Neckl ine.

Ano ther idea would be to m ark the entire developm ent as a Diametric, instead of Extracting Triangle, and

now marked on the chart . These assumpt ions ind icate an incomp lete B, but conf i rms only on faster drop b

Neckl ine, wh ich is sti l l awaited.

The week ended 9thNov, how ever, com pleted the 32-week cycle, and Index has reacted as per this cy cle.


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quest ion whether the upw ard cycle is now over as per 32-week cycle .

30% Principle

Al l major tops are character ized by 30% drop from the top value. This is no rmal not o nly ins ide a bear phacommo nly seen even inside a bul l phase too. The 30% taken out from the cur rent top value on Sensex (21

less th an 14800.

The total loss s o far, from th e high of 21109 to 15425, measures arou nd 28% so far. However, on B SE SmaMidCap Index, the loss from 2010 high does measure more than 30% .

Overal l , i t was argued mu ch earl ier, that we wou ld see a topp ing form ation spread ov er 2-3 mo nth period b

Oct10. This played out well as suspected. Indeed, as was observed, 60% of stocks topped out during Ocmany have al ready sh aved off muc h m ore than 30%, though Sensex i tse l f 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 periodju s t bof 21206 was hit on Sens ex. This was also an extremely vo lati le periodof nearly two months, just before the mtopped out.

The followingchart of 2008 period shows two equidistant parallel channels. The Sensex broke above the o


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and achieved an equidist ant height at the upp er paral lel , 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 manumber of sell-offs beginning Oct07, before it finally topped on 8

thJan08.

Asimilarity can be drawn for the 2010 top formation with the developments of 2008, as shown below.Setesting th e lower Blue paral lel , from where it bou nced recently. It is now t rading abov e the Blue paral lel , re


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2450-point Grid chart for the Sensex

Sensex has been fol low ing a Grid of 2450-2500 points since 2008. These Grids are shown on the Weekly chabelow. One can find a bottom or a top getting formed at each of the Grid levels.Thoug h the Grid level around 15300 did pro ve sup port lately, Index is now breaking th e 17800 grid level.


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Our markets, remember, has seen mu lti fo ld ral l ies previously , each time con tinuin g for abou t 4 (four) years,

usual ly enters a m ul t i -year consol idat ion phase. In other words, long-term has always meant 4 years in Remember, Sensex rallied11-fold from 390 (Mar88) to 4546 (Apr92) in four years, after which itconsol idatedfrom 1992 to 2003.

In 2008, it completed another 4-year rally from 2003, during which Sensex rose 7-fold fro m 3000 levels tonow 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 concorrective phase beginning Mar09 retraced about 99% of the previous fallfrom 21206 (Jan09) to 8867 (Marlabeled as a Triple Combination). The longer t ime requi red w hi le ral ly ing is sym ptomat ic of i ts correct ive lab

The rally from 8047 (actually beginning at 8867) was, therefore, considered as the B leg. The next leg dowbe labeled as C.Such a-b-c development since Jan08 would be considered part of the 2

ndwave of wh at

prob able Terminalbeginning 2003.

Even though we saw the market reaching levels above Jan08 highs, the multi-year cons ol idation is expecl ike a large decade-long Diametric, looking similar to the consolidation we saw from 1992 to 2003. Our tradingstra teg ies should be designed accord ing ly .

The suspected corrective phase beginning Jan08 would be the 2nd

wave within t he larger 5thwave. This 5

th

suspected to be forming as a Terminal due to absence of impuls ive behavior in i ts in terna l 1stwave. The Te

when the Sensex drops below the 2-4 line of one higher degree.


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One may see the Yearly chart in Appendix, which shows the 2-4 line and its values for the next three years. Remedevelopm ent usu al ly violates the 2-4 l ine.

The Sensex is assumed to be under the influence of a large 8-year cycle ever since its birth. As shown on the charwas the beginn ing of 8-year long bu l l -run ti l l '1992. In our Super-Cycle Degree count, shown on ASA Long-Terseparate paragraph, weve considered 1984 as the beginning point for the most dynamic 3rd wave.

The next two important turn ing points occu rred exact ly 8 yearsthereaft er, in '1992 and '2000. Both these turmarked by stock market scams, because of which, the leaders of the rally had extremely difficult time later. For exleading stock of '1992 bull market, remained below its highs till end of '2004. Similarly, the IT stocks, which were lerally, 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 cu58% from 6150 in 2000 to 2594 in 2001 .

We had, accordingly, targeted sub -10k levels for Sens exprice-wise during 2008-09, and a minimum of 13 mophase, time-wise. The price-time targets were achieved as Sensex dropped 63% from 21206 to 7697. The yearly

below, which was used earlier to project 20000 level for the Sensex during 2007, was broken when the Index movBreak of th is long- term channel a lso weighed in favor of a larger correct ive phase fo l lowing th is 8-year cy


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Appendix : Lo ng-term s cenar ios 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 7656corrective within this Complex Corrective phase formed as a "Non-Limiting" Running Triangle. This has been my pscenario for many years, which I had assumed to be under development since I began long- term forecasting durinThis one was the basis of Forecast for the 21 stCentury article published in Business Standard (which can be reavivekpatil.com).

This scenario also combines well with the traditional channeling technique. Sensex followed a parallel channel for from Apr'1992 to May'2003. As I had shown, if one projects the width of this channel on upper side, such a projecti20000 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 3

rdwas an exten

achieved exactly 261.8% ratio to the 1ston log scale. The Sensex is now forming its 5th Wave, and the same is likea Terminal, because its lower-degree 1

stwave since May03 developed as a Diametric (a corrective structure ra

impulse).

Within the non-directional legs, 2nd was exactly 61.8% of 1st value-wise, and 161.8% time-wise. The 4th was 38.2wise, 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 webe extended waves. This scenario is shown on the the chart given below :


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Development from May03 is a 7-legged Diametric formation, marked as a-b-c-d-e-f-g. It is called "Diametric" becatwo Triangular patterns, one initially Contracting up to the "d" leg, followed by an Expanding one. The contractioleg, and the legs on either sides of it tend to be equal. Accordingly, "c" and "e" were equal in "log scale", both showgains. Similarly, "g" was equal to "a", both showing about 115% gain.


19/20

.

The Diametric development from 2003 to 2008 has been considered as the 1st of the 5th. Due to the corrective str

leg, larger 5

th

could be developing as a Terminal. Since 2008, we are into its 2nd wave, which could continue to deyears from 2008.

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

The wave-count presented on ASA Long-term Index favors the alternate wave-scenario discussed above. The labmarket is into the lower-degree 5th of the SC-degree 3

rdor 5

thwave. If a "Double Extension" unfolds, Sensex could

achieve even 50000+.

A break of 2-4 line would confirm the Terminal development inside the 5th, and would therefore, restrict the upside

levels than 50K, but end surely above 21000.

If the 5thprov es to be a Termin al, one larger-degree label of 3rdwi l l have to change to 5th, because only a 5

be a Terminal. The Super-Cycle-Degree markin g fo r 1stand 3

rdshown , would then change to 3

rdand 4

thres

shown in Whi te.


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Disclaimer : These notes/comments have been prepared solely to educate those who are interested in the useful aTechnical Analysis. While due care has been taken in preparing these notes/comments, no responsibility can be oany consequences resulting out of acting on them.

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Weekly Technical Analysis 31ST DEC 2012

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